Employment Security Department faces critical state audit, thousands struggling with overpayment notices

OLYMPIA – Washington’s embattled Employment Security Department received a critical audit for its handling of hundreds of millions of dollars of losses to hackers in the spring.

Reviewing the actions around those losses, the audit concluded the department “did not have effective internal controls in place to ensure unemployment benefit payments were made only to eligible claimants.”

The Office of Financial Management also did not properly identify and report those fraudulent payments separate from benefits paid on legitimate claims, auditors said.

The budget agency said it didn’t report the losses as an “extraordinary event” because it expects the federal government to cover most of them. The department said it didn’t report the money it received from the federal government to cover the losses because it wanted to allow time to investigate the fraud and come up with a final number.

The state paid out some $600 million in early May to false or stolen identities, likely international swindlers with pirated personal information from previous data breaches around the country. Auditors estimated about $250 million had been recovered at the time they were reviewing the books, although ESD Commissioner Suzi LaVine said Friday the recovery amount is now up to $357 million “and rising.”

More audits are underway, State Auditor Pat McCarthy said: “We are still learning about what happened and vetting the information. I expect more clarity in the months to come.”

Overpayment demands

Those findings, in the overall State Financial Audit for the fiscal year ending June 30, come as the department grapples with a more recent problem.

Its phone lines, which were jammed early this year after historic increases in new benefit claims because of the pandemic, are strained again after some 26,000 people were notified they might be forced to repay some of those benefits. The notices of overpayment come from them being placed in the wrong program as the department tried to handle both the state’s regular unemployment benefits system and a separate federal program to cover people the state didn’t.

Many of the people from whom the state is demanding repayment remain unemployed. While the department says most of them may in fact owe nothing if they supply the proper information, they were threatened with collection action like garnishment if they don’t.

Karrah Galaviz, a paraeducator who was laid off in March when schools were shut down, and her husband Luis Galaviz-Torres, a construction worker who was just going back to work from the winter slowdown when the pandemic hit, have been notified that together they could owe $27,000.

It was her first time applying for unemployment, Karrah Galaviz said, although as a seasonal construction worker her husband was familiar with the system.

When they signed up, she said, the system prompted them to file for Pandemic Unemployment Assistance, or PUA, the special federal program set up by Congress.

“We were just following the prompts,” Karrah Galaviz said. After receiving the notice in November that they could owe money due to overpayments, she said she tried to contact the department, had trouble getting through on the phone and eventually had to settle for requesting a callback.

“When I signed on, (a callback) was two weeks out. Nobody ended up calling me.”

Galaviz and her husband are among hundreds of people in the state who have contacted the Unemployment Law Project for help.

Historic demand and problems

2020 has been a year with unprecedented demand and problems for the Employment Security Department, which manages the state’s unemployment benefits program.

In March, as COVID-19 hit Washington and many businesses were ordered to close, new claims for unemployment benefits went from 6,548 in the first week of the month to 181,975 in the final week. The state also suspended the one-week waiting period previously used for verifying claims for paying benefits in an effort to get relief quickly to the growing number of jobless workers.

That quick turnaround was a deficiency in the department’s financial reporting, the audit said.

“ESD did not have effective internal controls in place to ensure unemployment benefit payments were made only to eligible claimants,” auditors said.

Commissioner LeVine, in a statement released after the audit was posted, said the auditors’ recommendations involve actions the department already has taken.

“Additionally, the areas they’ve identified as causes have already been disclosed, identified and – where it is in the state’s power to do so – acted upon,” she said.

Washington was among the first states to be hit by hackers and it helped the federal government and other states prevent more thefts, she said.

OFM, which told auditors the state believes the federal government will pay for losses from the fraud that are not recovered by the investigation, should check with the U.S. Department of Labor to make sure that’s correct and improve the internal controls at the Employment Security Department, auditors recommended.

Demands for accountability

Republican leaders in the Legislature responded Friday to news of the audit by demanding more accountability from Employment Security leadership.

“If an everyday state employee was found being irresponsible for a much smaller amount of dollars, they would’ve been out of here faster than you could say their name,” said House Minority Leader J.T. Wilcox, of Yelm.

Rep. Drew Stokesbary, a top Republican on the Appropriations Committee, said the lack of accountability “continues to sow mistrust” among the public.

Gov. Jay Inslee and his staff are reviewing the audit, although many of the recommendations have already been implemented by the department, said Tara Lee, the governor’s communications director.

Inslee is “very open to additional improvements and changes to strengthen the system” and will continue to have conversations with LeVine about these issues, Lee added.

After falling victim to the sophisticated fraud, the department required increased verification of an applicant’s identity. But those stronger ID requirements are also a reason that some unemployed workers have had their benefits stopped or are being told they may need to repay past benefits.

Not the only one

Linda Ball, who was laid off from a part-time job with Stay Alfred in Spokane Valley in March, said she was told in November to verify her identity and sent photos of her driver’s license and Social Security card.

She was sent a letter that said she owed $86, then another that said she owed $1,480. It took her two hours to get through on the ESD’s phone lines, and when she did, the person with whom she was connected couldn’t explain it, she said.

He did say, however, “You’re not the only one,” she recalled.

Approximately 26,000 people were notified in the first two weeks of November that their benefits might be reduced or suspended, and they might owe money because of a possible overpayment. They were asked to supply more information or reapply for state benefits.

Many of them were people who either hadn’t worked enough hours before being laid off or were in jobs not eligible for state benefits, but became eligible for Federal Unemployment Assistance Payments when Congress approved the CARES Act, said Nick Demerice, the department’s director of public affairs.

Over time, the state may have received additional information from their former employer that made them eligible for state benefits. This fall, the federal government required anyone eligible for state benefits to be moved from the federal to the state plan.

Those people were sent a form letter telling them they had to take action to move between the programs. Only about half did, Demerice said. The half who didn’t were told if they were denied federal benefits retroactive to the time when they became eligible for state benefits. About 3,000 responded, but about 10,000 did not.

Poor wording

The problem with the notices, according to Juliana Matthews-Repp, managing attorney for the Unemployment Law Project Spokane, is that they were poorly worded. The language was confusing, particularly for people who speak English as a second language.

At one point, about one in three calls to the project office in Spokane involved people worried they were being ordered to pay money they didn’t have for a problem they didn’t understand.

Demerice said the letters contained “standard language that we are legally required to use.” But after two weeks, they put the notifications on pause.

“A 50% response rate was not good,” he said.

In fact, most people who received the notices will not be required to pay back anything if they provide the department with information needed to switch them to state benefits, Demerice said. Instead, they’ll start receiving state benefits and the state will reimburse the federal government for earlier payments to the unemployed worker.

Compounding the problem is the estimated overpayments include the $600 weekly payment from another federal program, Pandemic Unemployment Compensation. But people who are eligible for state benefits were also eligible for that payment, so switching from PUA to the state system will cancel that obligation.

For workers who received notices to provide further proof of identification, those obligations should go away when their identity is verified, he said.

If they weren’t truthful about their unemployment record or why they were separated from their job, they could be responsible for an overpayment. For a small number of people in certain occupations, federal benefits were higher than state benefits, and the state doesn’t have the authority to waive the difference, but that could change based on negotiations in Congress.

“Anyone who does owe something, we will work out incredibly generous terms,” he said. The department will not garnish wages.

Lee, Inslee’s spokeswoman, also offered assurances that anyone who has returned to work will not have their paychecks garnished for an overpayment question at this time.

But if they are still receiving benefits, they need to contact the department to avoid facing an offset that would reduce their weekly benefit claim, she said.

“We remain hopeful this is resolved with federal legislation shortly,” Lee added.

Reporter Laurel Demkovich contributed to this story.