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SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Arizona Department of Economic Security’s Unemployment Insurance
(UI) program administered by the Division of Employment and Rehabilitation
Services (Division) pursuant to a November 20, 2002, resolution of the Joint
Legislative Audit Committee. This is the second in a series of reports of the
Department of Economic Security (Department) and was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951
et seq. The first audit reviewed the Department’s welfare programs (Auditor
General Report No. 04-02). The remaining audits will include reviews of the
Department’s information technology and its service integration initiative, and
the Division of Developmental Disabilities’ fiscal intermediaries program. The
final report will be an analysis of the 12 statutory sunset factors.
The UI program is a federal program overseen by the U.S.
Department of Labor (DOL) and administered by the states. Employers pay federal
and state unemployment insurance taxes, and these taxes are used to administer
the program and pay benefits. Claimants must have had sufficient earnings and
must meet other requirements, such as actively seeking work and being unemployed
through no fault of their own, to receive unemployment benefits.
Division should improve eligibility determination accuracy
(see pages 13 through 19)
The Division’s accuracy rate in determining whether claimants
are eligible for UI benefits is significantly below DOL standards and national
averages. Division staff determine claimants’ eligibility for UI benefits. The
Division measures the accuracy of these determinations through two federally
required quality control review programs. One review, which is done quarterly,
focuses on the eligibility determination process and found that the Division’s
accuracy rate in 2003 was only 43.1 percent, compared to DOL’s standard of 75
percent. The national average for that review was 71 percent in 2003. The second
review, which is done annually, estimates overpayments and found Arizona’s
overpayment rate in 2003 was about 22 percent, the third highest in the United
States. DOL does not set a standard for the overpayment estimate. Several
factors should be addressed in order to improve the Division’s high error rates:
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The Division does not regularly use data from its
overpayment review to help identify and reduce errors, although the review
shows the causes of errors and who is responsible for overpayments. To help
reduce errors, the Division should analyze this review data and use the
results to train staff.
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Division staff are required to choose from numerous
finely differentiated reasons to support their eligibility determinations.
As a result, quality control reviews found errors even when the overall
decision to pay or deny benefits was appropriate. The Division should
simplify and reduce the number of reasons staff must select from in making
determinations.
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The Division has not established standards in its formal
policies and procedures for supervisor reviews of eligibility
determinations. However, managers indicated that supervisors are expected to
review one or two cases per week for each of their staff, using the same
criteria used in DOL quality reviews. To help identify errors and provide
staff training opportunities, the Division should establish standards and
work to ensure supervisors apply review criteria correctly.
Other contributing factors to the high error rates include
staff turnover due to temporary employees leaving to accept permanent positions
that provide benefits and difficulty filling vacancies. Converting some of its
temporary positions to permanent full-time or part-time positions and
cross-training employees could also help the Division address its high error
rates.
Division provided inaccurate employer
tax information to IRS
(see pages 21 through 24)
Due to long-standing errors in a computer program and the
Division’s failure to validate the data it sends to the Internal Revenue Service
(IRS), the Division has reported inaccurate employer tax information to the IRS
and, as a result, has potentially subjected employers to penalties and
assessments. The IRS provides states with federal employer tax information,
including reported taxable wages. States must match the IRS data to their own
information and provide the results to the IRS. This process is known as the
Federal Unemployment Tax Act (FUTA) certification program. The IRS uses the
results to determine if employers are eligible for credits, or if they must pay
assessments and penalties because they underpaid taxes or did not comply with
requirements to report wages to both the state and the IRS. According to
division IT staff, the FUTA certification computer program has existed since the
1980s and contains hard-to-follow logic that makes needed changes difficult to
analyze.
Although the Division attempted to correct the errors during
this audit and provided the IRS with revised tax year 2002 data in July 2004,
auditors identified continuing errors. Specifically, the program failed to
report tax payments for some employers. The Division needs to comply with the
IRS requirement to validate the data it reports to the IRS. It should also
conduct a targeted review based on the errors found by this audit, correct its
computer programming, and test its corrections. In addition, the Division should
track information on requests for certifications to help it identify and correct
the sources of errors. Finally, the Division should update and revise its FUTA
certification policies and procedures and ensure that staff follow them.
Division should improve process
for determining employer tax liability
(see pages 25 through 30)
Although the Division has taken steps to improve its process
for determining employer tax liability, it can do more to increase timeliness
and accuracy. It receives employer tax application information from the Arizona
Department of Revenue (DOR). Division staff then determine if employers must pay
UI taxes and what rate they must pay. Federal timeliness standards require
states to show that at least 60 percent of these determinations were made within
90 days from the last day of the quarter in which the employer first became
liable and that 80 percent were made within 180 days from the last day of the
quarter in which the employer first became liable. Prior to calendar year 2004,
the Division met these standards, but only because it processed mainly new
applications, allowing older applications to build in an inventory of
unprocessed applications. In an effort to improve service to employers, the
Division changed this practice in February 2004 and is now processing all
applications, including 4,500 applications that had accumulated as of July 2004.
The Division did not meet new determination federal timeliness standards for
federal fiscal year 2004 and is currently under a corrective action plan.
Untimely determinations can affect employers by making them
ineligible for lower federal tax rates, as well as claimants who may be
initially denied benefits if the Division has not yet determined their
employer’s liability. In an effort to improve timeliness, the Division is
working with DOR to implement an automated system to more quickly transmit
employer applications from DOR to the Division.
The Division has also struggled to meet federal accuracy
standards for employer tax liability determinations in the past and was under a
corrective action plan in federal fiscal year 2004. For calendar year 2003, it
reported meeting the federal standard for the first time since 1998. Arizona’s
2004 corrective action plan submitted to DOL shows that the Division intended to
improve accuracy through filling vacancies, increasing the frequency of work
reviews, and enhancing training. To improve the tax determination process, the
Division should develop a comprehensive policies and procedures manual,
implement a continuous training program, and fill management and supervisory
positions.
Division should improve management
of employer refunds and audits
(see pages 31 through 35)
The Division should improve its management of two additional
employer-related functions: refunds and audits. First, the Division should
improve its process for issuing refunds to employers who have paid more than
they owe in taxes. The Division maintains a list of pending refunds but needs to
correct errors in the list. The Division’s pending refunds list showed that in
June 2004, more than 25,000 employers were eligible to receive over $7 million
in refunds ranging from $3 to $132,538. Many of these refunds had remained
unprocessed for over a year. However, the pending refunds list contains errors,
such as one data entry error totaling $99,000, that require correction. Once it
has corrected the errors, the Division should develop a system to more
effectively notify employers of credit balances and ensure that employers
receive accurate refunds in a timely manner.
Second, the Division should continue its efforts to improve
its employer audit practices. DOL requires states to audit employers to ensure
that wages and employees are properly reported. Auditors review payroll records,
tax returns, and bank statements to determine if the employer complied with
state UI reporting requirements. However, the Division has not met DOL’s audit
quality standards for the past 6 years. In addition, the Division did not meet
DOL’s quota for audits in 2003. States must audit at least 2 percent of their
contributory employer population each calendar year. In calendar year 2003, the
Division was required to audit 2,141 employers, but the Division audited only
1,810, or 1.7 percent. To help ensure that it meets federal employer audit
standards, the Division hired new staff in February and May of 2004, conducted
audit quality training in June 2004, and is in the process of implementing an
automated system for conducting employer audits.
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