The Virginia Employment Commission has “paused” its collection of overpayments to unemployed Virginians as the beleaguered agency struggles to address rising backlogs of disputed claims and appeals that continue to strain the state unemployment system 18 months after the COVID-19 pandemic began.
The state faces at least $86.7 million in improper payments made to people who were not eligible for unemployment benefits, but were paid in large part because the VEC did not fully review almost a half-million reports by employers to determine why people were separated from their jobs, according to a hard-hitting new report by the Joint Legislative Audit and Review Commission.
The interim report by the legislative watchdog agency estimates the total cost to the Virginia Unemployment Trust Fund could reach $930 million after the state completes all appeals and acts on requests to waive repayment of the excess benefits under a new law that the General Assembly adopted this year to protect unemployed Virginians from additional financial hardship. That includes an estimated $70 million in fraudulently obtained state benefits, some of them to inmates in state prisons.
While those issues await resolution, the VEC “has paused all collection efforts,” Lauren Axselle, project leader of the JLARC study, told the joint legislative commission on Monday.
Secretary of Labor Megan Healy, who assumed the newly created Cabinet position on July 1, confirmed the delay in collections, but she strongly disputed the $930 million estimate.
“Not even close,” Healy said of the JLARC estimate in an interview after the 90-minute presentation. “I look forward to working with them to get the right number.”
She said many of the improper payments were made to people who weren’t eligible for traditional state unemployment benefits, but who could have received help under a temporary federal benefit for independent or “gig” workers who previously had not shown up in the state system.
Others are applying for waivers under the new state program to forgive excess payments that people received with no fraudulent intention.
“A lot of these individuals are going to be struggling to pay them back,” she said.
In her remarks to the commission, Healy acknowledged many of the failings that the report said undermined the VEC’s response to a pandemic that forced more than 400,000 people out of work and increased claims for unemployment benefits by tenfold.
“I totally agree that the VEC was not prepared for this pandemic,” she said.
However, Healy said much of the fault lies with chronic underfunding of the system, which until this year had not received state tax revenues for its operations, but relied instead on federal sharing of payroll tax revenue that ranked 51st in the country. JLARC plans to address funding issues in the final report due in November.
As a result of funding shortfalls before the pandemic, Healy said, the VEC lacked the staff to handle unemployment claims during the health crisis, during which the agency had to close its offices to protect against a deadly virus that killed two employees. The agency had 13 outbreaks in its offices.
“It’s pretty amazing that we distributed $14 billion to Virginia’s economy,” she told the commission.
Senate Minority Leader Tommy Norment, R-James City, bridled at her praise for the system, reminding her of the thousands of telephone calls that legislators have received from unemployed Virginians “who are absolutely desperate” for their benefits.
“We need to get people back to work so we don’t have to worry so much about unemployment insurance,” said Norment, who previously objected to the continuation of enhanced federal unemployment benefits through Labor Day under the American Rescue Plan Act.
Del. Terry Austin, R-Botetourt, expressed concern for unemployed Virginians whose “backs are against the wall.”
“We just have to put this on the front burner,” Austin said. “It is an issue of grave concern.”
Healy replied, “I agree with you.”
VEC officials did not appear at the JLARC presentation because the agency remains subject to an ongoing federal class action lawsuit filed by advocates for unemployed Virginians last spring. U.S. District Judge Henry Hudson declined to dismiss the lawsuit last month because of continuing concerns expressed by callers to his office, even though the VEC had met a court-approved deadline to almost completely eliminate a backlog of 92,000 disputed unemployment claims.
JLARC staff estimated a growing backlog of 100,000 additional disputed claims requiring adjudication, including specific issues that Virginia had put aside while dealing with the flood of initial claims last year but the U.S. Department of Labor is now requiring the state to review.
Virginia has hired more than 200 contract employees and 137 state employees to adjudicate disputed claims, which were at the heart of the lawsuit filed last May and a subsequent settlement agreement between the state and six advocacy organizations.
Gov. Ralph Northam issued an executive directive last May ordering the agency to clear the backlog in disputed claims, as well as improve the performance of customer service centers and complete a long-overdue upgrade of an antiquated computer system for handling unemployment claims.
Healy claimed progress on all fronts, thanks to a $15 million boost in state funding to improve call center performance and complete the IT upgrade. The assembly also allocated about $34 million in federal emergency aid to the VEC, or more than its annual operating budget before the pandemic.
The JLARC study found that the state’s call centers — operated by the VEC and contractors — answered just 4% of incoming calls and blocked almost a half-million calls in July. Subsequently, the agency has contracted with Deloitte, an international professional services firm, to provide 300 employees at a new call center to help callers navigate the system.
The wait time for answering calls rose to 10 hours in June after the VEC blocked fewer calls from going through at all, but Healy said in an interview that the wait time is down to nine minutes.
“We’re seeing the light at the call centers,” she said.
The VEC also is preparing to turn on a new IT system on Oct. 1 for customers to use to track claims as part of the modernization program delayed last year because of the pandemic. JLARC staff said the modernization effort, begun 12 years ago, is essential to improve service.
“The current system is a large contributing factor to the VEC’s poor COVID response,” said Axselle, who noted that this phase of the project was supposed to have been completed in 2013.
“All things considered, VEC’s unemployment insurance modernization project has taken much too long to implement,” she said.
JLARC also warned of potential risks in the rollout of the new system because of unproven technology for accurately moving data from the old system to the new one, as well as potential harm to people filing for benefits if the blackout during the transition takes more than five to seven days.
VEC said last week that the system will be unavailable beginning at noon on Sept. 29 and urged people to file their weekly claims for benefits between Sept. 26 and Sept. 29.
“Once the new system is live, users will be able to file a claim with an effective date retroactive to the day they became eligible for benefits,” the agency said last week.
JLARC said the VEC’s performance during the pandemic also reflected poor communication, both internally and to the public, especially in failing to explain complex eligibility rules for state and federal benefits.
“This is something that needs urgent attention,” Axselle said.
The study also faulted a lack of state oversight of the system before the pandemic.
“Additional state oversight is necessary for an agency of VEC’s size and critical mission,” it recommends.