Do the feds owe the state Department of Labor $44 million?

The state Department of Labor missed out on $44 million in federal funds because it failed to apply for pandemic-era unemployment insurance reimbursements, the state Comptroller’s Office claimed in a new audit. The department disputed the results of the audit and said it was only made aware of the opportunity to apply for reimbursements in May, though the comptroller’s office said that it first alerted the department to the issue years ago.

When the pandemic began and businesses closed down across the county, the federal government expanded unemployment benefits in both scope and duration, enabling people who did not qualify for state unemployment benefits (or had already used them up) to still receive unemployment payments. Although the money came from the feds, it was distributed through the state’s normal unemployment system, which meant the state Department of Labor was responsible for distributing both state and federal unemployment benefits – which each came from separate pools of money.

After reviewing the state Department of Labor’s unemployment system in 2022, auditors found that the department had overridden internal controls during the pandemic in order to ensure that eligible New Yorkers received benefits. 

In some cases, this resulted in state and federal unemployment benefits being mixed up. The state comptroller’s office identified $44 million of such “irregular disbursements” – money distributed to unemployment beneficiaries that should have come from the U.S. government but actually came out of the state’s coffers. The auditors recommended that the state Department of Labor seek reimbursement from the federal government. 

But that never happened.

Auditors who performed a follow up audit in June told City & State that the Department of Labor did not apply for federal reimbursement of the missing $44 million.

When asked about the reimbursement by the auditors, the state Department of Labor said that state labor law precludes them from readjusting unemployment claims after one year unless there is evidence of “fraud or misrepresentation,” so it is too late for them to correct the claims that should were mistakenly classified as being part of the state’s unemployment program instead of the federal one. That answer did not satisfy the auditors.

“They're saying that there is a time limit for them to readjust claims and that it is past the limit,” Deputy Comptroller for State Government Accountability Tina Kim said. “But you know, this was an issue that was brought up to them during the course of the (2022) audit.”

In the past, New York’s unemployment benefits system has come under fire for its lack of efficiency and fraud protections. Agency professionals attributed the issues to an archaic claims system that is currently in the process of being updated. 

As for the $44 million in potential federal reimbursements, it is little more than a rounding error to an agency that had to take out over $5 billion in federal loans to replenish its unemployment trust fund’s coffers in response to the pandemic. Still, the state Comptroller’s Office said that applying for the federal reimbursement could have meant at least some savings for New Yorkers, who are now on the hook for the massive federal loans.

“When you take out a loan from the federal government to pay your UI claims, rates go up for businesses within New York, and so that is always a concern,” Kim said.

The state Department of Labor said in a statement that it only learned last month about specific claims that may be eligible for federal reimbursement.

“The New York State Department of Labor is currently reviewing the Comptroller’s report in detail and intends to submit an official response in the coming weeks,” the statement reads. “Regarding the $44 million referenced in the report, the Department disputes the characterization of these claims as ‘questionable’ or ‘fraudulent.’ The Department also notes that (the Office of the State Comptroller) did not provide any details about which specific claims were identified until May of 2024.”

Kim said she understands the predicament that the department is in, but every dollar of taxpayer money counts. “There needs to be accountability for that money,” she said.