Kansas Department of Labor, legislative auditors at odds over scale of unemployment fraud

Andrew Bahl
Topeka Capital-Journal
The Kansas Department of Labor and Legislative Post Audit are at odds over how much money has been paid out in fraudulent unemployment claims.

The Kansas Department of Labor and the Legislature's auditing division are at odds over how much money has been paid out in fraudulent unemployment claims, with a new estimate released Wednesday saying that as much as $600 million in bogus payments were made last year.

Initial findings from a report issued by the Division of Post Audit used KDOL figures that showed 157,000 claims had been flagged as potentially fraudulent, roughly 24% of the total claims filed in 2020.

The analysis showed roughly $200 million for fraudulent claims came out of the state's regular unemployment program, with the remaining $400 million coming out of federal programs set up during the COVID-19 pandemic to help those without work.

In a strident response, KDOL requested that the $600 million figure be retracted, with Deputy Labor Secretary Brett Flachsbarth writing in a formal response that it is "flawed" and "insufficiently supported."

The agency argued that not all of the 157,000 claims were actually fraudulent, with payments stopped before funds were paid out in some cases.

KDOL also said that it was incorrect to assume that fraud was equally prevalent in both state and federal programs, such as the Pandemic Unemployment Assistance targeting gig workers and the self-employed. 

They instead pointed to their own figures, released Tuesday, which showed $290 million in fraudulent payments from both state and federal unemployment programs.

"We disagree with the methodology used and the numbers of fraud reports," Flachsbarth said. "The numbers provided by LPA are not in line with the data analysis we have provided."

The Legislative Post Audit data was described as a "high level, preliminary estimate" and will be refined in the second part of the report.

But Justin Stowe, lead auditor for the Division of Post Audit, told reporters that his team was comfortable enough with the figure to include it in the report.

"We don't think that number is wildly unrealistic based off what we have seen in the data," Stowe said, noting it was "not necessarily a perfect estimate but a reasonable estimate."

Republicans said they put stock in the Post Audit estimates and said they felt the problem could be even more extensive than the figures would appear to indicate.

"I would absolutely put my faith in what the (audit) provided for us," Rep. Kristey Williams, R-Augusta, told reporters after the hearing. "I think the idea that (fraud) is at 24% is a reasonable number based on what we are seeing in the number of claims and the fraudulent payments that employers have reported."

Gov. Laura Kelly told reporters Wednesday afternoon that she was ordering an outside audit of the data, although there is no timeframe for its completion.

"There are questions that people have and we want to answer those questions," she said at a Statehouse news conference.

Flachsbarth said the issues were part of a "thousand-year flood" due to historically high unemployment during the COVID-19 pandemic, with officials having to juggle paying out legitimate benefits with shoring up fraud protection.

Kelly has argued an out-of-date computer system has made matters worse and has pointed the finger at Republicans for not doing more to modernize it during the last decade.

And Acting Labor Secretary Amber Schultz said in a statement Tuesday that Congress was also to blame for limiting what states could ask prospective claimants, as well as for creating a series of new unemployment programs in a short period of time.

But legislators weren't satisfied with these explanations. They pointed to data in the audit that showed regular unemployment claims began rising sharply in the fall of 2020, something they believe to clearly be a result of a rash of fraudulent filings.

Rep. Kristey Williams, R-Augusta, listens to testimony on an audit of the Kansas Department of Labor's handling of fraud in the unemployment system.

Williams said the state received federal anti-fraud dollars from Washington in September yet claimed no substantive work was done to address the issue until stricter security measures were put in place last month — something KDOL officials dispute.

"I just want to know when we are going to stop blaming other people," Williams said. 

KDOL admitted as early as August that fraud was rampant in the PUA program, which Flachsbarth said lacked for months the type of verification protocols that are required in regular unemployment.

But the audit notes that fraudsters shifted their attention to the regular unemployment programs starting in November 2020. Due to the sheer number of overall claims as a result of the pandemic, the manual process for flagging bogus claims didn't work, the report said.

KDOL officials have been quick to point out that fraud is a nationwide issue, a point of agreement with the audit.

But Rep. Sean Tarwater, R-Stilwell, said companies that operate in multiple states, including Kansas, found that a majority of their fraudulent claims were coming from the Sunflower State.

"From what we can tell, Kansas was a much bigger problem than many other states," Tarwater said.

Flachsbarth said this was "anecdotal information" that "seems to be fitting a preconceived narrative."

"That Kansas is somehow the only state or an outlier or number one in fraud is categorically false and not supported by any publicly available data," he said. 

The audit noted that the agency has been undertaking improvements in its efforts to thwart fraud, including moving from manual to automated detection efforts. The agency also beefed-up protocols in January, which it says has halted over 4.8 million fraudulent login attempts.

But legislators fear long-term damage.

The audit noted the trust fund that pays out unemployment benefits has been depleted by 75% over the past year, leading to worries that the taxes employers pay to contribute to the account will go up.

And KDOL disputes that workers and businesses can be held responsible for fraudulent claims filed in their name, although legislators are working on clarifying that no taxes or employer contributions would need to be paid on bogus filings.

It is part of a sweeping legislative effort to change how employers and employees alike interact with unemployment programs. The bill would also require greater oversight of any modernization of KDOL's aging technology infrastructure, which has been blamed for the fraud woes.

In the meantime, legislators are concerned that legitimate claimants remain unable to access their benefits. KDOL has maintained that steps have been taken to reduce a backlog of cases in recent months and boost the number of workers at the agency's call center.

Anxious residents still report they aren't being paid and can't even reach the agency on the phone. That includes a Wellington woman, Re'Nae Pherigo, who has launched a hunger strike outside the KDOL headquarters until her case, and the situations of other Kansans, get attention from the agency.

"Something is wrong," Williams said. "It isn't just the fraud aspect, it is the whole Department of Labor."