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Improve the Integrity of the Unemployment Insurance Trust Fund


Texas’ unemployment insurance (UI) trust fund reached a deficit of $529.8 million at the end of fiscal 2002. The Texas Workforce Commission (TWC), which administers the UI program, plans to impose a major tax increase on Texas employers to make up this deficit. Although TWC has some fraud detection and overpayment collection initiatives in place, more needs to be done to support the fund’s long-term solvency and keep employer taxes as low as possible. The State Auditor’s Office should help TWC implement innovative fraud detection and overpayment collection strategies. TWC also should contract with a private collection agency to increase overpayment collections.


The unemployment insurance (UI) program was established in 1935 to help ensure the financial security of America’s workers. The U.S. Department of Labor (DOL) and the states jointly administer this complex program, which provides temporary cash benefits to workers who lose their jobs through no fault of their own.

UI funds come from federal and state taxes levied on employers. States collect the portion of taxes needed to pay UI benefits, while the federal tax pays for state and federal administrative expenses and other program costs.

Each state maintains a trust fund for its UI tax collections. Texas’ fund is required by state law to maintain a minimum balance of 1 percent of the state’s total taxable wages. This statutory floor was $759.8 million at the end of fiscal 2002; the actual balance, however, was just $230.0 million, leaving an estimated deficit of $529.8 million. To make up the deficit, employers will pay a “deficit tax” that could raise their total UI tax rate by as much as 68 percent in 2003. To make matters worse, Texas plans to borrow up to $500 million from the federal government between October 2002 and April 2003, at 6 percent interest, to ensure that it can pay its UI claimants.[1]

According to a July 2002 study by the U.S. General Accounting Office (GAO), neither DOL nor the states are doing enough to reduce UI fraud and overpayments, which are harming the solvency of state funds already hard-pressed due to economic downturns.

GAO concluded that states could do a much better job of reducing UI fraud and overpayments. Of $30 billion in UI benefits paid out nationally in calendar 2001, nearly $2.5 billion were overpayments; of this amount, $578 million (24 percent) was attributable to fraud or abuse (Exhibit 1).[2]

Exhibit 1
Overpayments by Category National Totals for 2001
(Millions of Dollars)

Categories of Overpayments Fraud Non-Fraud Total Overpayment Percent of Total Overpayment
Eligibility issues-not eligible for UI, not available to work, not seeking work, illegal alien or not enrolled for job services required by law. $106.2 $757.2 $863.4 35%
Benefit year earnings-overpayments due to erroneously reported or unreported earnings. $326.6 $437.9 $764.5 31%
Separation issues-claimant became unemployed for reasons not covered by state or federal law for receipt of UI benefits, including being discharged. $126.2 $386.1 $512.3 21%
Base period wages-errors in reporting/recording wages or amount of work. $10.2 $190.3 $200.5 8%
Dependent issues-erroneous reporting/recording of dependents’ information. $0.2 $24.6 $24.8 1%
Other causes-such as benefits paid during a period of disqualification or reversal of benefits due to an appeals decision. $8.1 $77.3 $85.4 4%
Total overpayments $577.5 $1,873.4 $2,450.9 100%
Note: Totals may not add due to rounding; overpayment figures do not include Colorado and Puerto Rico.
Source: U.S. General Accounting Office.

Texas UI integrity processes

By controlling benefit payments, ensuring claimant eligibility and protecting UI funds from fraud and potential overpayments, Texas can help keep the state UI trust fund solvent while keeping employer taxes to a minimum.[3] States generally are responsible for designing and implementing their own UI “integrity” activities, based on DOL guidelines. The Texas Workforce Commission (TWC) has established a series of steps to verify applicant eligibility and inform claimants of their responsibilities:

  • TWC’s automated benefits system, implemented in 1996, provides intake staff with access to claimant wage and employment history information when claimants first apply for benefits.
  • Since May 1998, TWC has opened seven UI Tele-Centers to process unemployment claims and updates over the telephone; claims are processed only after the caller’s identity is confirmed.
  • All claimants receive “Benefits Rights” information that identifies penalties for providing false information, failing to report earnings or being unavailable at all times to seek work.
  • Claimants must certify that they understand the program’s eligibility requirements and assert that the claim is valid and the payment is proper when they endorse UI checks.
  • Claimants must participate in reemployment activities designed by local work force development boards promptly after filing their initial claims; a daily cross-match with the TWC benefits system determines whether this requirement has been met.
  • Claimants who turn down job offers or fail to report for required reemployment services are investigated and may be determined ineligible for benefits.[4]

TWC has made a number of encouraging improvements to its integrity program since 2000. Notably, TWC worked closely with DOL’s Office of Inspector General (OIG) to develop the Fictitious Employer Detection System (“FEDS”), a computer program that helps agencies detect certain types of employer fraud.[5]

TWC provided the Comptroller’s office with a list of eligibility, fraud detection and overpayment recovery strategies under way at the agency:

  • When TWC detects an overpayment, it notifies the claimant by mail and telephone. Potentially improper UI payments are assigned to 62 investigators, 29 of whom are in the Central Office and 33 in the Tele-Centers.
  • Wage record accuracy is verified by TWC’s Tax Department through the agency’s benefits system and UI wage reporting database.
  • TWC contacts claimants’ former employers when undocumented wages are identified; if not resolved, the Tax Department’s field auditors conduct an investigation.
  • Claimants’ Social Security numbers are cross-matched against tapes provided by the Social Security Administration to verify eligibility.
  • TWC uses cross-match programs that compare the information provided by each applicant for UI benefits with a number of available data systems in the state. These programs allow intake staff to verify that all wages are reported and accurate, to verify that an applicant is not receiving UI benefits in another state, and to verify that applicants are not working.
  • TWC uses the U.S. Immigration and Naturalization Service’s Systematic Alien Verification to Entitlement program to automatically verify the identity of foreign claimants.
  • Overpayment collections are pursued through follow-up calls and collections letters.
  • TWC’s automated work search verification project identifies UI claimants who have not signed up for work search services through their local workforce board. Investigators are alerted to investigate these cases. Investigators also examine samples of claimant records to ensure that they applied properly for jobs while receiving benefits.
  • All former claimants with outstanding overpayment debt are “flagged” in the UI benefits system so that any new claim can be reduced by the amount of the outstanding overpayment.
  • TWC files legal documents to attempt to recover claimant overpayments resulting from fraud or a significant amount of underreported earnings. If the recipient does not return the overpayment within 30 days, TWC files an abstract of assessment with the claimant’s county clerk to place a lien against his or her property.
  • TWC has a toll-free phone number for employers and others to report fraud and improper payments, and has added a “Tip Line” link on its agency Web site to allow visitors to report fraud.[6]

Further improvement needed

Despite TWC’s current efforts, Texas continues to lag behind other states in terms of overpayments and fraud detection.

UI fraud cases involve individuals who work while receiving benefits; claim UI while on vacation; or misrepresent their identities to claim benefits. Other fraud can occur through fictitious employer schemes and the use of illegal aliens to claim benefits in “kickback” schemes. Overpayments not due to fraud can have a variety of causes, such as agency errors and inaccurate or untimely employer information.[7]

Recent data from DOL indicate that more than 14 percent of Texas’ initial UI payments are too high, compared to a national average of 8 percent, suggesting that the state’s safeguards are inadequate. About 2.3 percent of all of Texas’ UI benefits paid represent overpayments, compared to a national average of less than 1.2 percent.

Moreover, Texas ultimately identifies just 0.53 percent of the benefits it pays as fraudulent, compared to a national average of 0.87 percent. This strongly suggests that fraud detection in Texas needs to be improved.[8]

Exhibit 2 compares Texas fraud and non-fraud overpayments to national averages.

Exhibit 2
Unemployment Insurance Overpayments Fraud and Non-Fraud
(Dollars in Millions)

  As Percentage of First Payment Dollar Amount Established As Percentage of Benefits Paid Dollar Amount Recovered As Percentage of Dollar Amount Established
Non-Fraud Overpayments
TX (fiscal 2001) 14.8% $31.0 2.3% $18.7 60.1%
U.S. (calendar 2001) 8.0% $372.4 1.2% $204.0 54.8%
Fraud Overpayments
TX (fiscal 2001) 0.7% $7.1 0.5% $3.5 48.6%
U.S. (calendar 2001) 2.7% $280.5 0.9% $166.5 59.4%
Source: U.S. Department of Labor.

Finally, Texas has a much higher UI “exhaustion rate” than the national average. This rate tracks the share of UI recipients who stay on UI for the entire duration of their eligibility. A low rate is desirable, since it implies that claimants have found new employment. Texas’ exhaustion rate was 67.2 percent in the first quarter of 2002, compared to a national average of 36.9 percent. UI claimants in Texas also stay on UI longer than the national average. While the exhaustion rate is not necessarily related to fraud or overpayments, reducing it would contribute to the fund’s long-term solvency.[9]

State Auditor assistance

One way to improve the deficiencies of Texas’ UI program is a management control review conducted by the State Auditor’s Office (SAO). A SAO study would recommend policies, controls and management approaches that could reduce fraud and overpayments.[10]

Private collection agencies

Some states contract with private collection agencies to collect UI overpayments. In August 1999, TWC launched a one-year pilot program with a private collection agency. Although $225,000 was collected, most of the collections resulted from initial letters. TWC discontinued the pilot because its UI staff spent too much time fielding questions from claimants about collection letters and repayment arrangements.[11] This problem could be avoided by establishing contract provisions requiring the collection agency to send letters, respond to inquiries and establish repayment procedures.

TWC used its own administrative funds to pay the collection agency a 14.9 percent commission on the overpayments it collected. Washington, by contrast, added a contingency fee to identified overpayments to fund its contract with a collection agency. Before TWC could adopt this approach, state law would need to be amended to establish penalty options for paying this fee because all overpayment amounts must be returned to the UI trust fund by federal law.[12]


A.The State Auditor’s Office (SAO) should develop innovative unemployment insurance (UI) fraud detection and overpayment collection initiatives and help the Texas Workforce Commission (TWC) implement them.

SAO should identify Texas UI fraud and overpayment trends and their causes, including state policies, management and operational practices and weaknesses in existing computer cross-matching and other integrity initiatives. The study should include thorough research on fraudulent schemes identified in other states and their detection, and should target industries most affected by fraud. It should identify cost-effective strategies leading to outcomes that TWC can measure, track and report. To the extent possible, it should be modeled on fraud studies in other government benefit programs such as Medicaid, and should include recommendations to improve UI claimant job search and placement strategies to reduce the percentage of claimants who exhaust their benefits.The SAO study should be completed in fiscal 2004. TWC implementation steps in response should take place no later than fiscal 2005. SAO and TWC should submit a joint report to the 2005 Texas Legislature that identifies all SAO recommendations; TWC steps to implement them and their impacts on overpayment rates and fraud identification; steps taken to reduce claimant exhaustion rates to ensure that claimants achieve employment more quickly; and legislative recommendations, if any, to improve the integrity of the UI trust fund in future years. TWC should fund the study with available UI funds.

B.TWC should fully implement all viable UI overpayment collection and fraud detection strategies identified by SAO.

TWC should cooperate fully with SAO and should begin implementing its recommendations as they are developed, if possible. Activities that result in measurable improvements to the UI overpayment collection and fraud detection processes at TWC should be included in the report to the 2005 Legislature.

C.State law should be amended to allow TWC to establish a contingency-fee contract with a private collection agency to aggressively pursue uncollected overpayments.

The amendment would allow TWC to establish a penalty for claimants whose overpayments remain delinquent. This penalty would pay the fee for a collection agency to assist TWC in implementing all recommended overpayment strategies SAO identifies. TWC should develop the proposed amendment in coordination with SAO and include it in the report to the 2005 Legislature.

Fiscal Impact

SAO could complete Recommendation A for approximately $278,000, based on a cost SAO identified during the 2001 legislative session for a similar study.[13] SAO estimated that the study would require 4,000 hours of work at $54.04 per hour plus indirect costs, such as administration and rent. TWC would support the study using existing resources. Since the study would be completed in one year, no additional funds would be needed after fiscal 2004.

TWC could complete Recommendation B with existing resources. The estimate assumes that the initiatives would decrease overpayments and increase fraud detection at least to national levels by the beginning of fiscal 2005.

Texas had $31 million in overpayments in 2001, which amounted to 2.3 percent of all benefits paid that year. Using the lower national rate of 1.2 percent, Texas’s overpayments would have been only $15.6 million.

In 2001, Texas recouped 60.2 percent of the $31 million in overpayments, or $18.6 million, leaving $12.4 million uncollected. Assuming the national average of 1.2 percent in overpayments and the national collection rate of 54.8 percent, $8.5 million of the $15.6 million in overpayments would have been collected, leaving $7.1 million uncollected. The national collection rate is used rather than the higher Texas rate because it is assumed that lower rates of overpayment would include a higher percentage of difficult-to-collect amounts. The net gain to the UI trust fund would be $5.3 million beginning in fiscal 2005.

Texas identified fraud in 0.53 percent of total benefits paid in 2001, or $7.1 million. Had Texas identified fraud at the national rate of 0.87 percent, it would have identified $11.7 million. Texas was able to collect 48.6 percent of that amount, compared to a national average of 59.4 percent. If Texas collected dollars identified through fraud at the national rate, it would have added an additional $3.3 million to the UI trust fund.

Thus, the total gain to the UI trust fund is estimated at $8.6 million ($5.3 million plus $3.3 million).

Recommendation C would be funded through contingency fees, once state law has been modified to allow them for this purpose, beginning in fiscal 2006.

Fiscal Year Savings/(Cost) to UI Trust Fund
2004 ($278,000)
2005 $8,600,000
2006 $8,600,000
2007 $8,600,000
2008 $8,600,000


[1]Telephone interview with Steve Riley, director of Tax, UI Insurance and Regulation Division, Texas Workforce Commission, September 12, 2002 and November 6, 2002.

[2]U.S. General Accounting Office, Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments (Washington, D.C., July 2002), pp. 2 and 10.

[3]U.S. General Accounting Office, Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments, p. 1.

[4]Materials provided by Cassie Carlson Reed, executive director of the Texas Workforce Commission, July 15, 2002.

[5]Telephone interview with Steve Riley, September 12, 2002.

[6]Materials provided by Cassie Carlson Reed.

[7]U.S. Department of Labor, Office of Inspector General, Unemployment Insurance Integrity: Fraud and Vulnerabilities in the System (Washington, DC, March 31, 1999), pp. 1-5.

[8]U.S. Department of Labor, Region IV Workforce Investment Act Memorandum No. 28-02 to Region IV State Workforce Investment Administrators, Unemployment Insurance Integrity Update, pp. 14 and 17.

[9]U.S. Department of Labor, “UI Data Summary, First Quarter 2002,” pp. 2, 5 and 6, (Last visited November 8, 2002.)

[10]Interview with Pat Keith, chief information officer, Texas State Auditor’s office, September 11, 2002.

[11]Materials provided by Cassie Carlson Reed.

[12]Telephone interview with John Hildebrand, chief, Division of Legislation, Office of Workforce Security, U.S. Department of Labor, October 7, 2002.

[13]Tex. S.B. 444, 77th Leg., R.S. (2001), Fiscal Note.