Lawmakers Push State Employment Officials on Fraud Security, Employer Taxes

State senators on Thursday pressed Employment Security Department (ESD) officials for details on security glitches, the future of employer taxes, and whether the state must repay federal funds lost in this spring's $576 million unemployment fraud.

The nearly hourlong work session, chaired by Sen. Karen Keiser (D-Des Moines), was only the second time lawmakers have been able to publicly question the agency's officials about the fraud and other pandemic-related issues. House lawmakers had their chance last week.

Thursday's session, conducted via Zoom, produced no startling revelations. But senators' questions were often probing and covered much of the ground that the state Auditor's Office and federal agencies are exploring five months after the May disclosure of the state's biggest-ever fraud.

Anti-fraud security was a key topic Thursday. Keiser, whose Labor & Commerce Committee has oversight of ESD, asked about the agency's use of outside vendors to protect its claims systems from fraud.

Last week, ESD disclosed a software glitch in its claims processing system, purchased from Colorado-based Fast Enterprises, that had allowed the agency to pay unemployment benefits before screening claimants for potential fraud risk.

Fast Enterprise has appeared to distance itself from the fraud by insisting that ESD didn't purchase the full anti-fraud capabilities when the vendor's system, known as Unemployment Tax and Benefits (UTAB), was rolled out in 2017, Keiser has said.

"We've had our issues with our vendor and with their approach to cybersecurity," said Keiser. She asked ESD Commissioner Suzi LeVine whether ESD had "made any choices or decisions about the ... future use of the vendor's system ... that would safeguard us more perhaps against fraud."

LeVine said ESD was reviewing potential changes to the agency's anti-fraud measures and noted that "some of those [changes] will be in partnership with our existing vendor and some will be outside of that vendor relationship."

ESD is "still investigating ... all that happened in order to more clearly understand each party's responsibilities in terms of the [claims] system and the administration of the system," LeVine said.

Sen. Lisa Wellman (D-Mercer Island) had questions about the role that out-of-state payments played in the fraud. She noted that ESD, in paying fraudulent claims, often "was sending money to places outside [the state] instead of directly to" Washingtonians whose identities were used to file fraudulent claims.

Some anti-fraud experts have suggested that a high number of claims with out-of-state banks might have been a red flag for so-called imposter fraud. LeVine told senators that many legitimate claimants used out-of-state banks.

Sen. Steve Conway (D-Tacoma) wanted to know if the state is on the hook for the federal portion of the unemployment benefits that were stolen but not yet recovered. To date, ESD says the state has recovered $346 million, and that the "net fraud loss" is $230 million. "Who pays?" Conway asked.

LeVine said ESD still hasn't determined exactly how much of the unrecovered money was state funds versus federal funds. Overall, of the more than $10 billion ESD has paid out during the pandemic, roughly two-thirds was federal funds, LeVine said.

Sen. Mark Schoesler (R-Ritzville) asked how the broader pandemic would affect the taxes employers pay to fund the state unemployment system.

In July, an ESD forecast showed that months of high pandemic payments would likely deplete the state's employment trust fund by early 2021. Under state and federal law, the ESD must take steps to shore up the trust fund, including possibly by borrowing federal funds or boosting unemployment taxes for employers.

ESD's July report projected that by 2022, employers' taxes could rise to an average of $936 per worker per year, or almost three times the expected 2020 figure of $317.

LeVine said ESD will have a more up-to-date trust fund forecast next week and a clearer sense of the implications for tax rates and how lawmakers might offset any increases. "The projections next week will give us a much better guide into what we might predict may happen to businesses," LeVine said.

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