Risk Management and Reducing Improper Payments

2017
Risk Series
Risk Management and Reducing

Improper Payments: A Case Study of the
U.S. Department of Labor
Robert A. Greer Justin B. Bullock

Texas A&M University Texas A&M University
Risk Series 2017
Risk Management and Reducing

Improper Payments: A Case Study
of the U.S. Department of Labor
Robert A. Greer
Texas A&M University
Justin B. Bullock
Risk Management and Reducing Improper Payments: A Case Study of the U.S. Department of Labor
www.businessofgovernment.org
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Department of Labor and Unemployment Insurance. . . . . . . . . . . . . . . . . . . . . . . 8
Risk Management and Organizational Performance. . . . . . . . . . . . . . . . . . . . . . . . . . .9
Operational Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Improper Payment Legislation and OMB Requirements . . . . . . . . . . . . . . . . . . . . . . . . 12
Role of OMB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
High-Risk Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Unemployment Insurance, Improper Payments, and Risk Management Strategies . . . . 17
Strategies Used by the DOL Unemployment Insurance Program via Program Letters. . . 17
Case Study: Reducing Improper Payments at the Department of Labor . . . . . . . . . . . . . 17
Strategy One: Developing UI Performance Measures. . . . . . . . . . . . . . . . . . . . . . . . . 18
Strategy Two: Developing the National Directory of New Hires. . . . . . . . . . . . . . . . . . 18
Strategy Three: Increasing Messaging with Claimants and Employers. . . . . . . . . . . . . 19
Strategy Four: Increasing Collaboration with High-Impact States. . . . . . . . . . . . . . . 20
Strategy Five: Providing Supplemental Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Strategy Six: Developing a State Information Data Exchange System . . . . . . . . . . . . . 21
Strategy Seven: Developing State Quality Service Plans . . . . . . . . . . . . . . . . . . . . . . 21
Strategy Eight: Creating an Unemployment Insurance Integrity Center of Excellence. . . 21
Assessment of the Eight Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Texas Workforce Commission
Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Impact of Efforts to Reduce Improper Payments in Unemployment Insurance . . . . . . . 25
Overall Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix I: Program Letters Associated with Each Strategy. . . . . . . . . . . . . . . . . . . . . . 33
Appendix II Interview Discussion Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Key Contact Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Reports from IBM Center for the Business of Government. . . . . . . . . . . . . . . . . . . . . . . 37
3
IBM Center for The Business of Government
Foreword
On behalf of the IBM Center for The Business of Government,
we are pleased to present this report, Risk Management and
Reducing Improper Payments: A Case Study of the U.S.
Department of Labor.
This report continues the IBM Centers long interest in risk man-
agement with a specific focus on employing risk management
strategies to reduce improper payments in the U.S. Department
of Labors (DOL) Unemployment Insurance (UI) program. There
is a long tradition of public management scholarship that has
provided empirical support for the hypothesis that management
matters for government performance. One specific management Daniel J. Chenok
activity that has been growing in prominence in federal agencies
over the last several years is risk management. More commonly
used in private sector firms, risk management has recently been
recognized as a valuable tool by public organizations.
Professors Greer and Bullock detail DOLs innovative approach

to improve outcomes and performance related to improper pay-
ments, which is an area of operational risk that has been identi-
fied as a legislative priority. Public managers faced with
operational risks, and more specifically, improper payments, can
use the information presented in this report to improve, create,
or adopt risk management strategies. These strategies can pro-
vide a set of tools for other agencies dealing with improper
payments. Dennis R. Kaizer
DOL and the state workforce agencies that adopted its strate-
gies provide managers with examples of how they can propose
and implement tools that address a variety of complex root
causes of improper payments. The report also highlights the
administrative challenges in solving complex policy problems
that require cooperation between federal and state agencies.
Understanding the strategies and methods DOL employs to
address rising improper payment rates will enable other manag-
ers to develop similar practices and improve organizational per-
formance. The accomplishments of DOL and the state workforce
agencies it has worked with demonstrate how managers can
comply with improper payment legislation and the associated
requirements of the U.S. Office of Management and Budget
(OMB).
4
This report serves as an excellent companion piece to recent IBM Center reports which exam-
ined other aspects of risk management that can help government agencies. In his report Ten
Recommendations for Managing Organizational Integrity Risks, Anthony Molina examines an
often overlooked aspect of risk, which is managing organizational integrity and striving to
create ethical organizations. In Managing Risk, Improving Results: Lessons for Improving
Government Management from GAOs High Risk List, Donald Kettl examines the types of risk
identified by the Government Accountability Office and how agencies can more effectively
guard against such risks. In their report, Improving Government Decision Making through
Enterprise Risk Management, Douglas W. Webster and Thomas H. Stanton discuss how agen-
cies can more effectively deploy and use an enterprise risk management approach.
We hope that this new report will assist government leaders in better understanding the strat-
egies and methods DOL employs to address rising improper payment rates and enable other
managers to develop similar practices and improve organizational performance.
Daniel J. Chenok Dennis R. Kaizer

Executive Director Partner, Federal Civilian Industry
IBM Center for The Business of Government IBM Global Business Services
[email protected] [email protected]
5
Executive Summary
This report provides a case study of how the U.S. Department of Labor (DOL) developed and
implemented strategies to reduce improper payments in the Unemployment Insurance (UI)
program. This study details DOLs innovative approach to improve outcomes and performance
related to improper payments, which is an area of operational risk that has been identified as
a legislative priority. The strategies presented in this report can provide a set of tools for other
agencies dealing with improper payments. The accomplishments of DOL and the state
workforce agencies it has worked with demonstrate how managers can comply with improper
payment legislation and the associated requirements of the U.S. Office of Management and
Budget (OMB).
Section One, Introduction, reviews the DOL and UI program objectives along with some
background information about improper payments. This section also reviews the connection
between risk management and organizational performance, paying particular attention to oper-
ational risks.
Section Two, Improper Payment Legislation and OMB Requirements, provides an overview of
the various pieces of improper payment legislation and the role of the OMB. In the discussion
of OMB requirements, this section addresses the review process for agencies and the criteria
for those identified as being at a high risk for improper payments.
Section Three, Case Study of Risk, Performance, and Innovation at Department of Labor,
summarizes the results of a content analysis of the relevant UI program letters from the DOL
detailing the tools and strategies for reducing improper payments. Program letters play the
role of communicating changes in the DOLs policies that affect state workforce agencies,
which are the entities implementing UI at the state level. These letters detail the DOLs find-
ings about the root causes of improper payments, tools, and strategies for combatting
improper payments, and, in effect, address risk management tools and strategies for minimiz-
ing financial and reputation risks to the program.
Section Four, Texas Workforce Commission Case Study, presents a case example of one
state, Texas, which adopted and implemented DOL strategies. This case study provides addi-
tional evidence with respect to the Department of Labors approach to risk management and
improper payments.
Section Five, Descriptive Analysis of Improper Payments in Unemployment Insurance,

reviews a descriptive analysis which presents time series trends in both the overall improper
payment rate as well as the various root causes of improper payments. From these trends,
several correlations between DOL risk management strategies and lower improper payments
are identified.
6
Section Six, Recommendations, concludes with a summary of the lessons learned from
DOL and the recommendations for other agencies that are interested in addressing improper
payments.
Based on the content analysis, case study, and descriptive analysis, four recommendations are
made for reducing improper payments.
Recommendation One: Establish clear metrics for measurement and evaluation.
Recommendation Two: Take advantage of recommended strategies and resources, but dont
be afraid to innovate.
Recommendation Three: Provide relevant and timely information to stakeholders.
Recommendation Four: A broad range of strategies is needed when the causes of operational
risks are varied.
Public managers faced with operational risks, and more specifically, improper payments, can
use the information presented in this report to improve, create, or adopt risk management
strategies. DOL and the state workforce agencies that adopted DOL strategies provide manag-
ers with examples of how they can propose and implement tools that address a variety of
complex root causes of improper payments. It also highlights the administrative challenges in
solving complex policy problems that require cooperation between federal and state agencies.
Understanding the strategies and methods DOL employs to address rising improper payment
rates will enable other managers to develop similar practices and improve organizational
performance.
7
Introduction
The Department of Labor and Unemployment Insurance
The Department of Labors (DOL) mission is to:
Foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of
the United States
Improve working conditions and advance opportunities for profitable employment
Assure work-related benefits and rights1
One prominent agency within the DOL is the Employment and Training Administration (ETA),
which administers the Unemployment Insurance (UI) program. The UI program plays key roles
in helping businesses, communities, and the nations economy. The program has helped to
soften the impact of economic downturns and bring economic stability to communities, states,
and the nation by providing temporary income support for laid-off workers since its creation in
1935.
The Unemployment Insurance program is a jointly administered federal-state program that

provides unemployment benefits to eligible workers who are unemployed through no fault of
their own and meet other state law eligibility requirements.2 Through payments made directly
to eligible, unemployed workers, the program ensures that at least a significant portion of the
necessities of lifemost notably shelter and clothingcan be met on a week-to-week basis
while a search for work takes place. The UI program is a federal-state partnership based on
federal law but administered by state government employees under state law. The structure
and financing through employer taxes make the UI program a unique social insurance pro-
gram. The roles of the federal government include3:
Ensuring state laws, regulations, rules, and operations conform and comply with
federal laws
Determining administrative fund requirements and providing money to states for proper
and efficient administration
Setting broad overall policy for administration of the program
Monitoring state performance
Providing technical assistance as necessary
Holding and investing all money in the unemployment trust fund until drawn down by
states for the payment of compensation
1. www.dol.gov
2. http://www.ows.doleta.gov/unemploy/uifactsheet.asp
3. http://www.ows.doleta.gov/unemploy/pdf/partnership.pdf
8
Due to the size and complexity of the UI program, and its role in disbursing funds directly to
individual claimants, it faces significant challenges in managing risk. One specific type of
operational risk occurs when the agency makes a payment error. These errors are known as
improper payments, and the DOL has devoted significant resources over the last six years to
reducing those errors and managing the associated risks.
Federal Improper Payments

Federal agencies make more than $2 trillion in payments to individuals and a variety of other
entities each year.4 An improper payment can be any of the following5:
Incorrect amounts paid to eligible recipients
Payments made to ineligible recipients
Payments for goods or services not received
Duplicate payments
Payments with insufficient or no documentation
On November 20, 2009, President Obama issued Executive Order 13520, Reducing Improper
Payments. This executive order added requirements for federal agencies to develop coordi-
nated efforts to eliminate payment errors, waste, fraud, and abuse within their programs. In
2010, Congress passed the Improper Payment Elimination and Recovery Act (IPERA). IPERA
set a 10 percent improper payment rate as a limit for federal programs. The improper pay-
ment rate for Unemployment Insurance had fallen from 2006 to 2009, but it began to
increase in 2010 and remained in violation of the IPERA standard for improper payments.
In response to an increase in improper payments, Jane Oates, the Assistant Secretary of the
Employment and Training Administration (ETA), issued Unemployment Insurance Program
Letter No. 19-11 (UIPL No. 19-11). This program letter laid out a strategy in which the ETA
encouraged its partners in state workforce agencies to adopt its national strategic plan to tar-
get improper payments, and in particular, overpayments. In this program letter, the assistant
secretary addressed the four main causes of unemployment insurance overpayments and set
forth a multipronged approach to reduce these improper payments. In the years that followed,
state workforce agencies began implementing specific strategies from the assistant secretarys
strategic plan. These strategies include:
Using national and state databases that allow for the cross-matching of new hires
Increasing direct communication between state agents and employers concerning reasons
for job separation
Increasing the uniformity of communicating programmatic information from state agents to
both employers and claimants
Risk Management and Organizational Performance

There is a long tradition of public management scholarship that has provided empirical support
for the hypothesis that management matters for government performance (OToole and Meier,
2011). One specific management activity in federal agencies that has been growing in promi-
nence over the last several years is risk management. More commonly used in private sector
firms, risk management has recently been recognized as a valuable tool by public organizations.
4. https://www.whitehouse.gov/omb/financial_fia_improper/
5. https://paymentaccuracy.gov/about-improper-payments
9
The benefits of risk management generally have been summarized in a series of IBM reports.6
Some of the benefits discussed include the following:
Improved decision making
Improved information flow
Gaining an understanding of the importance of sustaining high credibility as an agency
Affording the opportunity for agencies to make more educated decisions
Staying off the U.S. Government Accountability Offices High Risk List
Better budget uncertainty management
Better positioning to take advantage of opportunities
Improved performance
The term risk is widely used to denote a variety of events and activities. The Government
Accountability Office (GAO) defined risk in a 2005 report7 as: An event that has a potentially
negative impact, and the possibility that such an event will occur and adversely affect an enti-
tys assets and activities and operations. This definition illustrates the more traditional focus
on risk management, which has been on events that have a negative impact. These events
include everything from Hurricane Katrina to Medicare fraud to financial crises. A more recent
conceptualization of risk and risk management has been to consider both threats and
opportunities. The future is uncertain and some of that uncertainty may result in events that
have a negative impact on an organizations objectives, but it may also result in events that
provide opportunities to further the organizations goals.
Webster and Stanton (2015) discuss the many limitations to the siloed approach in risk man-
agement. For example, the lack of communication creates gaps in identifying and managing
risks across organizational subdivisions. There are also inefficiencies in treating and managing
risks that may be shared by several agencies. This lack of strategic alignment results in lower
than optimal investment in risk management strategies.
To address these limitations of traditional risk management, many public agencies have imple-
mented a more holistic approach to risk, called enterprise risk management (ERM). ERM is
defined as:
[A] process, effected by an entitys management and other personnel, applied in
strategy setting and across the enterprise, designed to identify potential events that
may affect the entity, and manage risk to be within its risk appetite, to provide rea-
sonable assurance regarding the achievement of entity objectives. (COSO, 2004)
One specific type of risk that has become a major focus for governments at all levels has been
errors in making payments to individuals or other organizations. These errors are typically
referred to as improper payments. During the normal course of operating large and complex
organizations there are external risks that the must be recognized and strategically managed,
such as changes to the market or consumer behavior. There is also a set of risks internal to
the organization that arise from operational systems or organizational disruptions. One impor-
tant aspect of a holistic ERM strategy that the U.S. federal government, among others, has
identified is recognizing, evaluating, and mitigating the risk of making improper payments.
6. For more detail see Hardy (2010), Kwak and Keleher (2015), Webster and Stanton (2015), and Kettl (2016).
7. Government Accountability Office, Report # GAO-06-91, December 2005, page 111
10
Operational Risk
Operational risk management involves managing uncertainties that arise from defective operation
systems or organizational disruption. Operational risk is unique from other types of risks on sev-
eral dimensions. Perhaps the key difference is that operational risk covers a wide range of risk
events that may not be included in risk management strategies under a more traditional frame-
work. Corporate financial institutions have been the focus of operational loss discussions, but all
organizations take on operational risks in running their daily business. Dowd (2003) attributes
the increasing significance of operational risk to some developments that appear to have boosted
the likelihood of operational loss events.8 These developments include the following:
The growth of e-commerce, which brings with it operational risk resulting from exposure to
external fraud and system security risks
The use of automated technology, which creates high-impact system failure risk
The growing use of outsourcing arrangements and participation in clearing and settlement
systems
The growing trend for [organizations]9 to act as large-volume service providers, insourcing
back and middle office functions
The federal government has faced its own share of problems stemming from operational risks
that can be traced back to the same types of developments presented in Dowd (2003).
Federal agency losses have often been the subject of media attention. As discussed in Kettl
(2016), the CBS program 60 Minutes has produced a series of reports on mismanagement
and payment errors in Medicare and FEMA. The agencies in question were all included in the
GAO reports on high-risk programs most prone to waste, fraud, abuse, and mismanagement.
The criteria for identifying high-risk programs looks very similar to the developments that
Dowd (2003) attributes to the growing significance of operational losses.
One important metric in the GAO High Risk List is the presence of significant improper pay-
ments. Not all improper payments are fraud, but they do all represent a loss to the govern-
ment. The GAO report focuses on the Medicare improper payments, but the Office of
Management and Budget (OMB) has designated 16 programs as high error. These high-error
programs are those that reported roughly $750 million or more in improper payments in a
given year. These programs are required to identify, track, and report improper payments; the
information is then used to determine the root causes of errors and to develop corrective
action plans to reduce improper payments. The history of both improper payment legislation
and executive orders is provided below. We also provide additional details about how OMB
has implemented this legislation.
Goal and Objectives of Report

The goal of this report is to use a risk management framework to better understand how federal
agencies manage operational risks and improve performance. Risk management has become an
increasingly common tool used by federal agencies, but there have been few attempts to ana-
lyze and implement strategies to mitigate risk. We provide an analysis of the DOLs innovative
strategic initiatives to improve risk management and lower improper payments. These strategies
represent an attempt by the DOL to use information technology and communication tools to lower
the improper payment rate; improve overall performance; and help maintain program integrity,
accountability, and efficiency.
8. The examples of Dowds (2003) development points are summarized and discussed in Moosa (2007).
9. The original context of this discussion is for banks and financial institutions. We have generalized these points to all organizations.
11
Improper Payment Legislation and

OMB Requirements
History
As we have discussed, there has been a history of legislation throughout the early 2000s to
lower the number of improper payments. The federal governments increased focus on
improper payments, however, began earlier. In 1982, Congress passed the Federal Managers
Financial Integrity Act (FMFIA). FMFIA required continuous evaluation of finance, accounting,
and internal controls to prevent waste, fraud, and abuse. As part of this evaluative process,
federal agency heads were required to submit annual reports to the president and Congress
regarding the processes each agency had implemented to improve internal control systems
and increase overall financial accountability. While FMFIA provided a useful first step in draw-
ing attention to improper payments made by the federal government, it lacked mechanisms for
remedying these errors.
President George W. Bush made improving government performance a key priority in his 2001
Presidential Management Agenda. President Bush pushed for government reform that
addressed the findings by the High Risk List reports. As part of this push, President Bush
called for Congress to take legislative action. Congress responded with the Improper Payments
Information Act (IPIA) of 2002. IPIA was a short bill that passed with bipartisan support. It
shifted the responsibility of identifying and tracking improper payments from the GAO to
agency heads and program directors. Additionally, the OMB was selected to work with the
GAO in the effort to minimize improper payments.
While IPIA was the first significant legislation in almost two decades to address the minimiza-
tion of improper payments, it was not without its shortcomings. To begin addressing these
shortcomings, President Obama issued Executive Order 13520 in 2009.10 This executive
order remedied several important deficiencies of the IPIA, including:
Requiring agency heads and the OMB to work to enact change by setting goals and targets
for the level of improper payments incurred by high-risk programs
Requiring the information gathered as a result of both the IPIA and the executive order to
be made available to the public
Following Executive Order 13520, Congress decided to take additional action with respect to
minimizing improper payments. In 2010, Congress passed the Improper Payments Elimination
and Recovery Act (IPERA). IPERA expanded requirements both for agency heads and for the
OMB. The OMBs director was required to report to Congress the progress being made in the
recovery of improper payments in the high-risk programs,11 while agency heads were required
to estimate and report the following:
10. Executive Order 13520 of November 23, 2009, Reducing Improper Payments and Eliminating Waste in Federal Programs.
11. Improper Payments Elimination and Recovery Act of 2010, Public Law 111-204 (July 22, 2010).
12
The methods used by the agency to recover improper payments

The amount of monies that are recovered, yet to be recovered, or cannot be recovered
The conditions that allow improper payments to occur
Legislation Related to Improper Payments

Federal Managers Financial Integrity Act (FMFIA) of 1982: An act that amended the Accounting
and Auditing Act of 1950. It requires ongoing evaluations and reports regarding the adequacy of
the internal accounting systems and administrative control of each executive agency.
Improper Payments Information Act (IPIA) of 2002, Improper Payments Elimination

and Recovery Act (IPERA) of 2010, and Improper Payments Elimination and Recovery
Improvement Act (IPERIA) of 2012: Acts that require agencies to periodically review all pro-
grams and activities and identify those that may be susceptible to significant improper payments.
Agencies must take multiple actions when programs and activities are identified as susceptible to
significant improper payments and annually report information on their efforts to monitor and mini-
mize improper payments.
The most recent federal legislation with respect to improper payments is the Improper
Payments Elimination and Recovery Improvement Act (IPERIA) of 2012. This act sought to
strengthen the previous efforts to identify, prevent, and recover payment error, waste, fraud,
and abuse within federal spending. IPERIA furthered efforts at transparency, making data
available to the public through a central website, clarifying the roles of Inspectors General,
and improving improper payment and recovery estimates. Additionally, IPERIA established the
Do Not Pay Initiative, which requires agencies to set up a formal review processusing sev-
eral databases12that provides the agency with relevant information on an individuals eligi-
bility to receive federal funds.
IPERIA supplemented the previous acts by further formalizing the sharing of important person-
specific data that would help prevent the agencies from making payments to ineligible recipi-
ents. The act also increased the role of the OMB both by requiring the director to provide
annual reports to Congress regarding the Do Not Pay Initiatives operations and allowing the
OMB to revise and reassess the effectiveness of its assessment methods.13 To this end, the
OMB released Circular No. A-123 to clarify its role.
Role of OMB
As we have highlighted, following IPIA, the OMB has played a central role in risk management
and mitigating improper payments by the federal agencies. The OMB has codified its broad
responsibilities in a document known as Appendix C to Circular No. A-123, Requirements for
Effective Estimation and Remediation of Improper Payments. The OMB used this document
to clarify its roles with respect to risk management and improper payment mitigation.
According to the OMB, the document works to accomplish the following:
12. Including, but not limited to, the Death Master File of the Social Security Administration, the General Services Administrations
Excluded Parties List System, the Debt Check Database of the Department of the Treasury, the Credit Alert System or Credit Alert
Interactive Voice Response System of the Department of Housing and Urban Development, and the List of Excluded Individuals/Entities
of the Office of Inspector General of the Department of Health and Human Services.
13. Improper Payments Elimination and Recovery Improvement Act of 2012, Public Law 112-248 (January 10, 2013).
13
Consolidating and streamlining reporting requirements for agencies and the Inspectors
General, and eliminating duplicative and old one-time requirements so agencies can spend
less time producing compliance reports and more time focusing on game-changing solu-
tions for achieving payment accuracy
Establishing new categories for reporting improper payments that will provide more
granularity on improper payment estimates, thus leading to more effective corrective
actions at the program level and more focused strategies for reducing improper payments
at the government-wide level
Introducing a new internal control framework to ensure that payments are made in the
right amount, to the right entity, and for the right purpose
Providing guidance to agenciesas required by the most recent statute, IPERIAto
strengthen the statistical validity of estimates and include payments to federal employees
in the definition of improper payments14
Appendix C provides requirements to accomplish these objectives across the following six
broad categories:
Payment recapture audits: Required for any program that expends at least $1 million
Low-risk programs: Must be reviewed at least every three years
Programs susceptible to significant improper payments: Agencies must annually estimate
and report improper payments and implement corrective actions
High-priority programs: OMB identifies and provides additional corrective tools for these
programs
Annual reporting: Yearly Agency Financial Reports (AFRs) or Performance and Accountabil-
ity Reports (PARs) should be written with an internal control framework as a guide
Annual Inspector General Compliance Review: Inspectors General in each agency must
review the agencys AFR or PAR for compliance.15
Finally, in Appendix C, the OMB highlights the review process it expects agencies to perform.
It is a four-step process:
Review all programs and activities and identify those that are susceptible to significant
improper payments
Obtain a statistically valid estimate of the annual amount of improper payments for those
programs that are identified in Step 1 as susceptible to significant improper payments
Implement a plan to reduce improper payments
Annually write an Agency Financial Report or Performance and Accountability Report
As the OMB requirements and guidance highlight, agencies must identify high-priority pro-
grams that require additional oversight. Below we will briefly discuss the high-priority pro-
grams list. We then turn our attention to one program on this list, Unemployment Insurance,
for analysis of its risk management strategies and attempts at lowering improper payments.
14. https://www.whitehouse.gov/sites/default/files/omb/memoranda/2015/m-15-02.pdf
15. Ibid
14
High-Risk Programs
The criteria for being designated as a high-priority program (also known as a high-error pro-
gram) is laid out in the previously discussed Appendix C. In accordance with Appendix C, the
OMB may classify a program as high priority if the program meets the following conditions:
It is susceptible to significant improper payments as defined by statute and OMB imple-
mentation guidance (including if the program has greater than $10 million in improper
payments and over 1.5 percent of payments are improper, or if the program has more than
$100 million in estimated improper payments) and it did any of the following:
Estimated and reported improper payments above the OMB-determined threshold
(currently $750 million in improper payments) or contributed to government-wide
improper payments in the most recent reporting year
Did not report an improper payment estimate for the most recent reporting year, but it
had reported improper payments before and did not receive measuring and reporting
relief from OMB
Has not yet reported an overall improper payment estimate amount but the aggregate
of the programs component improper payments is above the threshold
Improper payment amounts are above the threshold, but improper payment rates are below
1.5 percent of program outlays, so agencies may work with OMB to determine if the program
can be exempted from fulfilling certain OMB requirements for high-priority programs16
Given these criteria, the OMB has designated 16 programs as high priority or high error.17
16. https://www.whitehouse.gov/sites/default/files/omb/memoranda/2015/m-15-02.pdf
17. https://paymentaccuracy.gov/high-priority-programs
15
These programs span six agencies and include public insurance, food assistance, pensions,
loans, and grants. While generalizations may be made across these 16 programs about their
risk management and improper payment mitigation strategies, we have decided to focus in
depth on a single program, Unemployment Insurance. In the following section, we provide
some background on the enduring relationship between Unemployment Insurance and
improper payments, and we present three types of analyses in a multi-method approach. First,
we analyze the Unemployment Insurance program letters that discuss how the DOL works to
mitigate improper payments. Second, we will provide a summary of a case study of the Texas
Workforce Commission and its approach to combatting improper payments. Third, we present
a descriptive analysis of improper payment rates and the root causes of improper payments in
all 50 states.
16
Case Study: Reducing Improper

Payments at the Department of Labor
Unemployment Insurance, Improper Payments, and Risk
Management Strategies
The relationship between the Unemployment Insurance program and improper payments has
been examined for the past 35 years. Concerns about rampant improper payments prompted
the creation of the National Commission on Unemployment Compensation. This commission
worked for two years, 1979 and 1980, and sought to examine the amount of improper pay-
ments within the Unemployment Insurance program in six metropolitan areas. The commis-
sion found that improper payment rates in these areas ranged from 2.3-25 percent (Kingston
et al. 1981). With this knowledge, the DOL initiated a process by which it could systemati-
cally measure improper payments across the entire country. This process eventually led to the
Benefit Accuracy Measurement program.
The Benefit Accuracy Measurement program, which began in 1995, has provided yearly esti-
mates of the amount of improper payments within the Unemployment Insurance program. The
provided estimates show improper payments overall and by state. This process was one of the
first of its kind. The Unemployment Insurance program led the way among federal government
programs in identifying, measuring, and mitigating improper payments. Unfortunately,
improper payment rates have remained stubbornly high.
Strategies Used by the DOL Unemployment Insurance Program via

Program Letters
To better understand the risk management tools and strategies the DOL uses, we reviewed
Unemployment Insurance program letters from the time when these tools and strategies were
being developed and put into practice. Unemployment Insurance program letters play the role
of communicating changes in the Department of Labors policies that affect UI state workforce
agencies, which are the entities implementing Unemployment Insurance at the state level.
We reviewed eight Unemployment Insurance program letters from 2011-2014. These letters
detail the Department of Labors beliefs about the root causes of improper payments through-
out the Unemployment Insurance program. They also provide eight strategies for combatting
improper payments, and in effect, addressing risk management strategies for minimizing finan-
cial and reputation risks to the program.
The letters establish four root causes of improper payments in the Unemployment Insurance
program:
Root Cause One: Payments made to claimants who continue to claim benefits after
returning to work and failing to report (or underreporting) their claims
Root Cause Two: Untimely and incomplete job separation information (information about
17
the laid-off individual, also known as an individual experiencing job separation, was
delivered late or incomplete to the Unemployment Insurance agents)
Root Cause Three: The states inability to validate that claimants have met the states
work search requirements (i.e., the state workforce agency cannot adequately prove that
the laid-off individual is meeting the states requirements for looking for a new job)
Root Cause Four: Claimants failure to register with the states employment service or the
agencys failure to process the employment service registrations
To combat these known financial and reputation risks, the DOL identified eight different strate-
gies, listed below. Appendix I presents Unemployment Insurance program letters associated
with each strategy.
Strategy One: Developing UI Performance Measures
Strategy Two: Developing the National Directory of New Hires
Strategy Three: Increasing Messaging with Claimants and Employers
Strategy Four: Increasing Collaboration with High-Impact States
Strategy Five: Providing Supplemental Funding
Strategy Six: Developing a State Information Data Exchange System
Strategy Seven: Developing State Quality Service Plans
Strategy Eight: Creating an Unemployment Insurance Integrity Center of Excellence
Strategy One: Developing UI Performance Measures

This strategy highlights the Department of Labors attempt to develop new performance mea-
sures related to Unemployment Insurance integrity. The performance measure developed to
protect Unemployment Insurance integrity is the percentage of Unemployment Insurance ben-
efits overpaid by a state due to benefit year earnings fraud. In other words, the main perfor-
mance measurement the Department of Labor puts forward is a ratio of the amount in
benefits improperly overpaid to individuals because of fraudulent reports of earnings compared
to the total amount paid out in benefits.
This measure highlights the Department of Labors concern with overpayments due to the root
cause of payments made to claimants who continue to claim benefits after returning to work
and failing to report (or underreporting) their claims. This measure standardizes across the
states the performance measure of greatest interest to the Department of Labor. The
Department of Labor hoped that by bringing prominence to this measure and establishing a
standardized, acceptable level of performance, states would devote more attention to minimiz-
ing this particularly common type of improper payment.
Strategy Two: Developing the National Directory of New Hires

The National Directory of New Hires (NDNH) seeks to address the same root cause as strat-
egy one: payments made to claimants who continue to claim benefits after returning to work
and failing to report (or underreporting) their claims. The use of the NDNH by the Department
of Labors auditing division had been mandated since December 30, 2007. The NDNH origi-
nally was created to aid in child support enforcement. Making it available to state workforce
agencies gives these agencies access to both wage data and new hire information that previ-
ously was unavailable.
18
The directory gives access to data on federal civilian and military wages along with the ability
to locate individuals who may have relocated to another state. The database allows for earlier
detection of individuals who are incorrectly reporting their wages and thus receiving overpay-
ments from the Unemployment Insurance program. This informational tool provides much bet-
ter access to data the states need to make accurate determinations about the benefits that
should or should not be paid out to an individual. This tool has also been effective in earlier
detection of improper payments.
Strategy Three: Increasing Messaging with Claimants and Employers

Implementation of statewide claimant-employer messaging campaigns is designed to:
Improve claimants awareness of their responsibility to report any work and earnings if they
are claiming benefits
Improve claimants understanding of work search requirements as a condition of eligibility
for benefits
Improve employers awareness of their responsibility to respond to state requests for
separation information and/or earnings/wage verifications
A detailed claimant-employer messaging toolkit was published in UIPL No. 11-12 with sam-
ple products for states to consider incorporating into their messaging campaigns.
The purpose of the toolkit is to remedy the root causes of improper payments by providing
resources to state workforce agencies to improve communication and understanding between
those seeking unemployment insurance benefits (claimants) and the individuals employers.
This toolkit has a variety of premade messages, templates, sample recorded videos, and audio
scripts that can be used by the state workforce agencies. Unemployment Insurance Program
Letter No.11-12 highlights and describes five specific resources provided in the messaging
toolkit:
Baseline message products offered in a variety of formats for state agency use, to be used
or customized as necessary
Message concepts on important topics, including basic requirements for Unemployment
Insurance benefits; requirements for claimants to remain in contact with the state agency
while actively collecting Unemployment Insurance benefits; procedures for claimants
returning to work; employer responsibilities related to reporting new hires to the State
Directory of New Hires; employer responsibilities related to verifying employee earnings;
and employer responsibilities related to reporting separation information
Examples of communication activities and messages to better inform and engage claimants
and employers throughout the Unemployment Insurance process
Suggestions for displaying these messages on the state websites
Suggestions for the use of social media
The toolkit seeks to use improved communication among relevant stakeholders for making
determinations about Unemployment Insurance benefits. The idea behind this tool is that with
better access to consistent information, employers and claimants will more easily provide rele-
vant and accurate information to state agents for determining the claimants Unemployment
Insurance benefits.
19
Strategy Four: Increasing Collaboration with High-Impact States

In strategy four, the Department of Labor again uses the strategy of increasing communication
and collaboration among important stakeholders; in this case, the relevant stakeholders are
the state workforce agencies themselves. For this tool, the Department of Labor worked with
11 high-impact states to pilot the instatement of cross-functional task forces. The task
forces develop and implement state-specific action plans to reduce improper payments and
provide national leadership to other states to aid in the reduction of improper payments.
The Department of Labor saw an opportunity to further encourage collaboration among some
of the largest states, which, due to the very nature of their size, have some of the most
improper payments. One way the Department of Labor chose to support this effort is by spon-
soring opportunities for collaboration among these states. For example, the Department of
Labor, through the Unemployment Insurance Integrity Institute, sponsored a series of collabor-
ative webinar sessions for the states cross-functional task forces. These webinars were
designed to provide states with a variety of tools and resources including a charter, a self-
assessment tool, a strategic plan template, data sources, and opportunities to consult with
subject matter experts.
Strategy Five: Providing Supplemental Funding

This strategy provides the lifeblood for implementing key tools. Additional funding opportuni-
ties provide the Department of Labor with a carrot on a stick to encourage states to adopt
several of the tools and to encourage states to continue to innovate and modernize their infor-
mation technology systems.
In the Unemployment Insurance Program Letter No. 18-12, the Department of Labor provided
supplemental funding opportunities to:
Support the integrity of the Unemployment Insurance program for the prevention, detec-
tion, and recovery of improper Unemployment Insurance benefit payments
Improve state performance
Address outdated information technology system infrastructures necessary to improve
Unemployment Insurance program integrity
Enable states to expand or implement Reemployment and Eligibility Assessment programs
For states to receive supplemental funding, the Department of Labor required that the states
had already begun engaging with a set of tools and resources labeled as core integrity activi-
ties. The Department of Labor required the following core integrity activities:
Continued operation of a cross-functional integrity task force
Engaging in a business process analysis to identify areas of weakness and improve pro-
gram performance if the states improper payment rate is above 10 percent
Activities listed in the Recommended Operating Procedures for conducting cross-matching
with the National Directory of New Hires and the State Directory of New Hires
Use of the State Information Data Exchange System and the associated messaging service
Use of the Claimant and Employer Messaging Toolkit
Use of the employment service registration
Implementation of the U.S. Department of the Treasurys Offset Program
20
Use of an automated State Unemployment Tax Act dumping detection system to detect
employers who may be engaged in Unemployment Insurance tax rate manipulation
This strategy not only plays the role of providing state workforce agencies with additional
financial resources to implement innovative practices, but it also serves as a strong incentive
to encourage agencies to implement a full range of the Department of Labors tools.
Strategy Six: Developing a State Information Data Exchange

System
This is another strategy which uses technology for aiding in communicating and sharing infor-
mation across the relevant decision makers and stakeholders in the Unemployment Insurance
benefit determination process. This system aids employers in responding to requests from
state Unemployment Insurance agents in a faster, easier, and more accurate manner.
The State Information Data Exchange System (SIDES) is a web-based system that allows elec-
tronic transmission of information requests and replies between Unemployment Insurance
agencies and multi-state employers and third-party administrators. SIDES currently allows for
the exchange of separation and earnings verification information. The system has two options
for employers:
Employers with large volumes of Unemployment Insurance information requests can have
access to an integrated computer-to-computer interface that facilitates an automated
data-sharing and file-tracking interface among employers, third-party administrators, and
Unemployment Insurance agents.
Employers with smaller amounts of Unemployment Insurance claims can use an e-re-
sponse portal that allows employers and third-party administrators to more easily and
efficiently respond to information requests from Unemployment Insurance agents.
Strategy Seven: Developing State Quality Service Plans

The State Quality Service Plan (SQSP) is a document used not only to ensure strong program
performance, but also to guide key management decisions, such as where to focus resources.
The SQSP should focus state efforts to ensure well-balanced performance across the range of
Unemployment Insurance activities. The State Quality Service Plan also is designed to be flexi-
ble to accommodate, among other things, multiyear planning and significant changes in cir-
cumstances during the planning cycle. States can use this flexibility to incorporate the
elements from the Program Integrity Strategic Plans developed by their cross-functional task
forces into the SQSP to address improper payments.
Strategy Eight: Creating an Unemployment Insurance Integrity

Center of Excellence
The Department of Labor funded the development of an Unemployment Insurance Integrity
Center of Excellence through a cooperative agreement with the New York State Department of
Labor, in partnership with the National Association of State Workforce Agencies. The centers
goal is to promote the UI programs development and implementation of innovative integrity
strategies, including the prevention and detection of fraud. The centers key activities include
developing the following:
Sophisticated new data analytics and predictive modeling tools to improve the prevention
and detection of improper payments
21
A secure portal for communicating fraud schemes in the UI program

Integrity training modules and disseminating these modules
Information related to best practices and model UI program operations
Products to help states improve their integrity operations
On-site technical assistance to identify operational changes that will improve program
integrity18
Assessment of the Eight Strategies

The complex institutional arrangement involving the DOL and state workforce agencies results
in a unique risk management strategy. The DOL, through the program letters and tools dis-
cussed above, has laid out its strategic vision for reducing improper payments. Because it
does not have administrative control over the state workforce agencies, it incentivizes states
using supplemental funding to implement these strategies. States then have the option to
apply for supplemental funding and implement the recommended strategies. DOLs manage-
ment of improper payments in this complex governance system requires innovative risk man-
agement that may be of use to other agencies or programs in similarly complex institutional
environments. Furthermore, the Department of Labor provided numerous specific and flexible
tools that can aid in the state workforce agencies pursuit of lowering improper payments. The
Department of Labor identified and classified the root causes of improper payments, and it
then designed tools that directly address those root causes.
Based on our review of the strategies, we found the following:

The Department of Labor has strongly encouraged increased collaboration between the
states and the federal government to implement strategies and tools that will aid the states
in lowering improper payments throughout the Unemployment Insurance program.
The Department of Labor established clear metrics by which state workforce agencies can
work.
The Department of Labor provided numerous tools and strategies for the state workforce
agencies while also allowing customization within these tools. Further, it encouraged states
to develop state-specific strategies.
The Department of Labor repeatedly highlighted the importance of a formal strategy that
allowed for a systematic risk management strategy to minimize improper payment rates.
The Department of Labor clearly identified the known root causes that needed to be
mitigated and then developed specific strategies to combat them.
The Department of Labor used financial resources to encourage states to better manage
and mitigate improper payment rates.
The Department of Labor provided to all stakeholders (claimants, employers, third-party
administrators, and state workforce agencies) multiple tools aimed at reducing the cost of
complying with Unemployment Insurance regulations.
The Department of Labor strongly encouraged the adoption of several tools that fostered
increased communication among relevant stakeholders and standardized the shared
information to increase effective communication and decrease confusion.
18. https://www.dol.gov/general/maps/strategies
22
The strategies and tools provided by the Department of Labor encouraged the state
workforce agencies to engage in several useful behaviors, such as better information
gathering, modernizing information technology systems, standardizing communication with
both claimants and employers, and using state and national databases to more quickly
catch claimants misreported or unreported wages.
23
Texas Workforce Commission

Case Study
As part of this study, we had the opportunity to discuss how these risk management strategies
are perceived and implemented within one state. In our case, we discussed these strategies
and implementation structures with ranking individuals at the Texas Workforce Commission
(Texas state workforce agency). We had the opportunity to speak with the Deputy Director of
Unemployment Insurance Customer Service and Operations, the Director of Statistical
Sampling, the Director of Business Transformation/Rapid Process Improvement, and the
Director of the Office of Investigations. We used a semi-structured group interview.19 For this
group interview, there were eight structured questions and significant time allotted for open-
ended discussion about the general topics of improper payments and risk management strate-
gies within the Unemployment Insurance program, as well as for discussing specific strategies
and tools for lowering improper payments and implementing a risk management framework.
Finding One: The Texas Workforce Commission took very seriously the issue of the preva-
lence of improper payments within the Unemployment Insurance program. Throughout the
discussion with the high-ranking Texas Workforce Commission officials, we were impressed
with the diligence and organizational resources dedicated to fighting improper payments. It
was clear that the commissions target was to comply with the Improper Payments Elimination
and Recovery Act. They want to be below the 10 percent improper payment rate and were
quite adamant about trying to utilize every tool available to them to lower improper payments.
To them, the problem of improper payments is not only a question of financial waste and
abuse but also a question of program integrity. This group takes very seriously the goal of
maintaining the integrity of the taxpayer for the Unemployment Insurance program.
Finding Two: The Texas Workforce Commission believes improper payments are a risk that
deserves specific management attention. Not only are members of this team encouraged to
think creatively about new strategies with respect to lowering improper payments, but they
also work closely togetherresembling an informal management teamto mitigate the risk of
improper payments. In this way, this group of individuals, along with others working in the
Texas Workforce Commission, serves the role of a dedicated risk management staff.
Finding Three: The Texas Workforce Commission was aware of the Department of Labors
sponsored tools that we asked about specifically, including NDNH, SIDES, and messaging.
The group also directly referenced additional tools sponsored by the Department of Labor,
including the UI Integrity Center of Excellence and information technology sources for employ-
ment services registration. We also learned that the Texas Workforce Commission essentially
takes advantage of every opportunity to apply for supplemental funding for implementing strat-
egies to lower improper payments. The Texas Workforce Commission conducts an internal
cost-benefit analysis to make sure the funding will have a net benefit in the fight against
improper payments; generally, the funding is found to have a net positive. The group uniformly
19. The interview was conducted on June 9, 2016. See Appendix A for interview questions.
24
found the supplemental funding to be a huge asset in attempts to implement additional tools
for lowering improper payments.
Finding Four: The Texas Workforce Commission had identified additional strategies it
believed to be useful in combatting improper payments, outside of those encouraged by the
Department of Labor. The group mentioned predictive analytics techniques for identifying
unemployment insurance claims that may be more likely to result in an improperly paid claim.
The group also mentioned the use of predictive analytics to develop criteria that would aid in
not only helping to identify improperly paid claims, but also helping to identify cases of fraud.
Finding Five: The Texas Workforce Commission staff we interviewed believed that the
Department of Labors strategies are helpful in reducing improper payments. They found the
NDNH strategy to be the most useful in minimizing improper payments, but they also found
SIDES and messaging to be useful. Texas was a pilot state for the regular use of the NDNH
database in the mid-2000s. Commission staff have found the regular check of wage informa-
tion by claimants against the NDNH database to be quite effective at catching improper pay-
ments much earlier, often before they occur. They also suggested that the SIDES tool was
particularly helpful for managing claims coming from large companies. Furthermore, they per-
ceive this tool as helpful both with the quality and speed of communication with large
employers. This level of communication does not always lead to a higher quality of informa-
tion for making determinations about claimants and the amount of benefits they should or
should not receive, though. Finally, the team found the standardization attempts from the
messaging strategy to be useful in ensuring that both claimants and employers have the cor-
rect information to accurately complete unemployment insurance claims.
Finding Six: The Texas Workforce Commission is working hard on their approach to risk
management and improper payments. We found:
The Texas Workforce Commission has responded to the improper payments target of less
than 10 percent that was set in IPERA.
The lowering of improper payments is a high priority to the Texas Workforce Commission.
The Texas Workforce Commission has made extensive use of funding and strategies made
available by the DOL.
The Texas Workforce Commission, following the encouragement of the Department of
Labor, has sought to develop new tools over and above the ones created by the Depart-
ment of Labor.
The leaders of the Texas Workforce Commission believe that NDNH, SIDES, and messaging
were all useful in lowering improper payments. The takeaway is better information gather-
ing, modernized information technology systems, standardized communication with both
claimants and employers, and the utilization of state and national databases to more
quickly catch misreported or unreported wages by claimants.
Impact of Efforts to Reduce Improper Payments in Unemployment

Insurance
This report on the risk management strategies used by the DOL to reduce improper payments
in state UI programs has so far focused on a detailed analysis of the content contained in the
program letters and an in-depth look at one states efforts to implement these strategies. To
complement these qualitative analyses, we now turn to a brief descriptive analysis which will
allow us to determine time series trends in both the overall improper payment rate as well as
the various root causes of improper payments. At the outset, we would like to recommend
25
caution in inferring too much about the determinants of these trends. We can identify several
correlations that may suggest the risk management strategies have a positive effect, but we
are unable to establish causation without considering alternative explanations and without
controlling for confounding factors.
Trends in Reducing Payments

The goal of both the Improper Payment Information Act and the Unemployment Insurance
Program Letter No. 19-11 was to lower improper payment rates. As shown in Figure 1, this
rate was increasing from 20092011 and then decreased from 20112013 before spiking in
2014. It should also be noted that the average improper payment rate was above the 10 per-
cent mark in all years. During the 10-year period there is a wide range of improper payment
rates in all 50 states and the District of Columbia. The lowest rate was 1.6 percent in
Oklahoma in 2004, while the highest was over 60 percent in Indiana in 2011. It is difficult to
directly compare states improper payment rates without considering variations in benefit
policies,20 but this time series graph demonstrates both the change in the average improper
payment rate over time as well as the variation across states over time.
Figure 1: Average State Improper Payment Rates 20042015
16
Improper Payment Rate
14
12
10
8
2005 2010 2015
Year
Improper Payment Rate Lower/Upper Bounds
Generated from yearly improper payment data for the UI program reported to OMB as required by IPIA
As discussed above, UIPL No. 19-11 was released by the Department of Labor to spearhead
several strategies to decrease the rate and amount of improper payments in the UI system.
The DOL found four root causes of improper payments. These root causes, discussed earlier in
the paper, include:
Root Cause One: Payments made to individuals after they have returned to work, referred
to as benefit year earnings (BYE)
Root Cause Two: Payments paid improperly as a result of untimely or incomplete job
separation information
Root Cause Three: Payments paid improperly as a result of states inability to validate that
the claimant had met the states work search requirements
20. The DOL strongly cautions readers in comparing one states payment accuracy rates with another states rates because no two
states have the same laws, regulations, and policies specifying eligibility conditions. The differences in these conditions influence the
potential for errors.
26
Root Cause Four: Payments paid improperly because the claimant had failed to register
with the states employment services
In the program letter, the Department of Labor decided to focus on reducing improper pay-
ments that resulted from the root causes using a variety of risk management strategies.
Reducing Improper Payments for Root Cause One: Receiving Benefits After
Returning to Work
The first root cause, benefit year earnings, occurs when the claimant continues to claim and
receive benefits after returning to work. Several risk management strategies, including the
NDNH database, were aimed at reducing improper payments caused by BYE. As shown in
Figure 2 below, the percentage of overpayments from BYE steadily increased from 2004-
2008, it dipped slightly in 2009, it rose rapidly until 2011, then it leveled off and slightly
decreased.
Assessment: While we want to caution against drawing too many conclusions from basic
descriptive statistics, it appears that the strategies initiated in 2011 may have contributed to
the leveling off of and slight downward trend for state overpayments from BYE.
Figure 2: State Overpayments from BYE 20042015
4.5
Percentage of Overpayments from BYE
3.5
2.5
2
2005 2010 2015
Year
Percentage of Overpayments from BYE lb/ub
Reducing Improper Payments for Root Cause Two: Incorrect Separation Infor-
mation
The second root cause, separation issues, occurs when information regarding the claimants
separation from work is received after a claim is paid, thus disqualifying the claimant from eli-
gibility. This may be caused by the employer sending inaccurate or late information. It may
also be caused by a ruling made on appeal. One of the key risk management strategies recom-
mended by the DOL was the participation in and use of the SIDES cross-matching system to
reduce improper payments due to job separation issues.
Assessment: As shown below in Figure 3, this is a similar story to root cause one involving
BYE. The percentage of overpayments due to separation issues increased before 2011 and
then leveled off and started to decrease. The main difference is that there has been a more
substantial reduction in overpayments from separation issues compared to those from BYE.
27
Figure 3: Percentage of Overpayments from Separation Issues 20042015
Percentage of Overpayments from Separation

4.5
3.5
2.5
2
2005 2010 2015
Year
Percentage of Overpayments from Separation lb/ub
Reducing Improper Payments for Root Cause Three: Inability to Validate Work
Search
The third root cause, work search requirements, involves the inability to validate that the indi-
vidual has met the states work search requirements, which disqualifies the claimant from
being eligible for benefits. One risk management strategy specifically for improper payments
from work search requirements is a campaign to target messages to claimants to prevent
improper reporting of work/earnings while filing for UI and to promote compliance with state
regulations.
Assessment: The time series for overpayment from work search requirements is in Figure 4.
As shown, the percentage of overpayments from work search requirements was stable through
2009, but it has been increasing most years since. This trend does not follow the same pat-
tern as the overpayments from BYE or separation issues.
Figure 4: Percentage of Overpayments from Work Search 20042015

Percentage of Overpayments from Work Search
1
2005 2010 2015
Year
Percentage of Overpayments from Work Search lb/ub
28
Reducing Improper Payments for Root Cause Four: Failure to Register

The fourth and final root cause described in the UI program letters is employment service (ES)
registration. This includes overpayments due to the claimant not being registered with the states
employment services or job bank as required by state regulations. Not being registered may dis-
qualify claimants from being eligible for benefits. Several of the strategies discussed in the con-
tent analysis, including several of the information technology resources, targeted ES registration.
Assessment: As shown in Figure 5 below, unlike the other three root causes, the percentage
of overpayments from ES registration has been decreasing since 2010. It should also be noted
that overall overpayments from ES registration are relatively few compared to the other three
root causes.
Figure 5: Percentage of Overpayments from ES 20042015
4
Percentage of Overpayments from ES
0
2005 2010 2015
Year
Overpayments from ES Registration Lower/Upper Bound
Overall Assessment
This assessment has described the time trends of both state improper payment rates and the
percentage of overpayments from the four main improper payment root causes. By reviewing
how these improper payments and root causes have changed over time, and the variation
across the states, we can start to develop testable hypotheses about the effectiveness of vari-
ous DOL risk management strategies on both state improper payment rates and the main root
causes. From our analysis, there is evidence suggesting that starting in 2011 (correlating with
the UIPLs), the percentage of overpayments from three of the four root causes leveled off or
started to decrease. The average improper payment rate is a little more difficult to interpret. It
does decrease from 20112013, but then there was a spike in 2014.
Recommendations
In this report, we have reviewed the risk management framework with specific attention paid
to operational risks. One crucial operational risk that has received a considerable amount of
both administrative and legislative attention in recent years has been improper payments. We
have reviewed the history of improper payments in the federal government before focusing on
one program that has a history of being high risk: Unemployment Insurance. UI presents a
unique risk management challenge because the DOL must work with state workforce agencies
to reduce improper payments. This report reviews the DOLs efforts to manage operational
risks across the states using a detailed content analysis of program letters, a case study of one
29
state implementing these strategies, and a descriptive analysis of time trends of improper pay-
ment rates and their root causes. Through these analyses, we present four recommendations
for managing operational risks in complex institutional arrangements.
Recommendation One: Establish clear metrics for measurement and evaluation.

Compared to other types of risk management problems, improper payment reduction has the
advantage of a clear standard established by law in the Improper Payment Elimination and
Recovery Act. The goal for federal agencies is to have an improper payment rate below 10
percent. The challenge for federal agencies that have partners in state agencies or other types
of organizations is developing clear metrics for evaluation and developing standards for data
collection and reporting, which the Department of Labor could do with state workforce agen-
cies. To achieve an overall reduction in improper payments, agencies may first start with iden-
tifying the root causes of improper payments that are most relevant. For the DOL this included
benefit year earnings, separation issues, work search requirements, and employment services.
Specific strategies can then be targeted to those root causes. For example, the UI performance
integrity measure of overpayments due to BYE fraud allowed for a standardized measure that
could be compared across states. Clear and measurable metrics for the root causes and the
outcomes is a necessary condition for improper payment reduction.
Recommendation Two: Take advantage of recommended strategies and

resources, but dont be afraid to innovate.
Gathering evidence from our descriptive empirical analysis, content analysis of program letters,
and the Texas Workforce Commission case study, it became clear that the DOL took an effec-
tive approach to providing necessary assistance to states. The DOL implemented its approach
using UI program letters and providing effective supplementary funding to encourage the
adoption of the recommended strategies. Furthermore, our case study suggests that the Texas
Workforce Commission has been working diligently to implement the provided risk manage-
ment strategies and tools, including tools directly from the DOL and new and creative tools
and strategies. The DOL provided several national tools and strategies for state workforce
agencies to use, but it also allowed for tool customization and further encouraged the develop-
ment of state-specific strategies.
Recommendation Three: Provide relevant and timely information to stakeholders.

One of the DOLs main goals in offering the recommended tools and strategies was to increase
communication between the relevant stakeholdersparticularly communication between state
workforce agents and employers and claimants. One of the DOL strategies, targeted messages
to claimants, was found to be an effective strategy to combat improper payments that were
caused by work search requirements, which is one of the identified root causes of improper
payments. More specifically, the messaging toolkit provided states with a variety of premade
messages, templates, sample recorded videos, and audio scripts that could be used by the
state workforce agencies. These premade resources provide specific guidance to aid in the
communication between state agents and both claimants and employers.
There have also been attempts to encourage communication of best practices among the
states through the UI Integrity Center of Excellence. These types of strategies were encouraged
throughout the UI program letters and were adopted and found useful in our Texas Workforce
Commission case study. This type of communication among states and the DOL takes advan-
tage of using states as pilot studies to identify best practices. Other states then can learn from
and adapt those best practices to their own unique needs. Federal agencies can often serve as
advocating agents to standardize the information, increase effective communication, and
decrease confusion.
30
Recommendation Four: A broad range of strategies is needed when the causes

of operational risks are varied.
From the descriptive analysis, we see that the time trends of the root causes of improper pay-
ments have significant variation across states and over time. We can also see that after the
DOL implemented its risk management strategies and started using the program letters not all
of the root causes were affected. To address these complex and varied causes of operational
risks like improper payments, a variety of tools and strategies are needed. Some of these strat-
egies, like the NDNH or SIDES databases, require information technology infrastructure and
buy-in from a variety of stakeholders. Other strategies, like the messaging toolkit, advocate
effective communication and are relatively easy to implement. When dealing with a complex
set of risks, it is useful to have a strategic plansuch as the State Quality Service Planthat
can guide key management decisions. This plan is designed to be flexible to accommodate
multiyear planning, changing operating environments, and different strategies for reducing
improper payments.
31
References
Committee of the Sponsoring Organizations of the Treadway Commission (COSO). Enterprise
Risk ManagementIntegrated Framework. COSO, 2004.
Dowd, Victor. Measurement of Operational Risk: The Basel Approach. In Operational Risk:
Regulation, Analysis and Management, edited by Carol Alexander, 31-84. London: Prentice
Hall-Financial Times, 2003.
Hardy, K. Managing Risk in Government: An Introduction to Enterprise Risk Management.

The IBM Center for the Business of Government, 2010.
Kettl, D. F. Managing Risk, Improving Results: Lessons for Improving Government

Management from GAs High-Risk List. The IBM Center for the Business of Government,
2016.
Kingston, Jerry L., Paul L. Burgess, and Robert D. St. Louis. Overpayments in the
Unemployment Insurance System in the United States. International Social Security Review
34 no. 4 (1981): 462-476.
Kwak, Y. and J.B. Keleher. Risk Management for Grants Administration: A Case Study for the
Department of Education. The IBM Center for the Business of Government, 2015.
Moosa, I. A. Operational Risk Management. Palgrave Macmillan, 2007.
OToole, L.J., Jr, and K.J. Meier. Public Management: Organizations, Governance, and
Performance. Cambridge University Press, 2011.
Webster, D., and T.H. Stanton. Improving Government Decision Making through Enterprise
Risk Management. TheIBM Center for the Business of Government, 2015.
32
Appendix I: Program Letters

Associated with Each Strategy
Strategies Program Letters
Strategy One: Development of UI Core Measures No. 17-11; No. 19-11
Strategy Two: Development of National Directory of No. 19-11
New Hires
Strategy Three: Increasing Messaging with Claimants and No. 19-11; No. 26-11; No. 11-12;
Employers Toolkit No. 24-13
Strategy Four: Increasing Collaboration with High-Impact No. 19-11; No. 28-11
States
Strategy Five: Providing Supplemental Funding No.19-11; No. 26-11; No. 18-12;
No. 24-13; No. 13-14
Strategy Six: Developing a State Information Data No. 19-11; No. 24-13
Exchange System
Strategy Seven: Developing a State Quality Service Plan No. 19-11
Strategy Eight: Creating an Unemployment Insurance No. 19-11
Integrity Center of Excellence
33
Appendix II Interview Discussion

Questions
For the group interview with the Texas Workforce Commission, the authors designed eight spe-
cific questions. These eight questions were as follows:
1. How big of a priority is lowering improper payments at the state level?
a. Does the state have any specific targets or goals for improper payment rates?
2. Do you view improper payments as a risk that deserves specific management attention?
3. Does your organization have a risk management office or a dedicated risk management staff?
4. Are you familiar with the National Directory of New Hires (NDNH), State Information Data
Exchange System (SIDES), and the Claimant and Employer Messaging (Messaging)
strategies that the Department of Labor described in a series of program letters?
5. In your opinion, what factors influenced the decision of the state workforce agency to apply
for supplemental funding from the Department of Labor to implement these strategies?
6. Are there any state-specific strategies for lowering improper payments that were not
encouraged by the Department of Labor?
7. According to the Department of Labor, Texas had completed the implementation of NDNH,
SIDES, and Messaging by 2012. What, if any, challenges were there in the implementation
of these strategies?
8. In your opinion, have these tools been effective in lowering improper payments?
34
About the Authors

Dr. Robert Greer is an assistant professor at the Bush School of
Government and Public Service at Texas A&M University. Dr.
Greer specializes in public budgeting and finance and is an
expert in state and local government debt, financial manage-
ment, and issues of federalism.
Greer earned both his MPP and PhD from the Martin School of
Public Policy and Administration at the University of Kentucky,
he has a BA in economics and business administration from
Trinity University, and he has an MPA from the University of
North Texas. He was the recipient of the 2012 Emerging
Scholar Award from the National Association of Schools of
Public Affairs and Administration (NASPAA) and was also
awarded the Hatton W. Sumner Scholar Award. He has been
published in numerous prominent journals includingPublic
Budgeting & Finance,Municipal Finance Journal, andPublic
Finance Review.
Justin B. Bullock is an assistant professor at the Bush School of

Government and Public Service and a research fellow at the
Institute for Science, Technology, and Public Policy at Texas
A&M University. Bullock earned his PhD in public administra-
tion and policy with a specialization in public management and
public policy from the University of Georgia in 2014, as well as
a masters in public administration and a bachelors in business
administration, also from the University of Georgia.
Bullock is a co-author of the first virtual issue of theJournal of

Public Administration Research and Theory (JPART). He also
co-authored How (Not) to Solve the Problem: An Evaluation of
Scholarly Responses to Common Source Bias, published
inJPART, and Attitudes about Hard Work: A Global Perspective
on the Beliefs of Government Employees in theInternational
Public Management Journal. Bullock has presented at confer-
ences of numerous national and international organizations,
including the Public Management Research Association, the
Midwest Political Science Association, the Southern Political
Science Association, the Association for Public Policy Analysis
and Management, the European Group on Public
Administration, the Academy of Management, and the
International Health Economics Association.
35
Key Contact Information

To contact the authors:
Robert A. Greer
Assistant Professor
Bush School of Government and Public Service
1099 Allen Building
4220 TAMU
College Station, TX 77843
(979) 862-3857
e-mail: [email protected]
Justin B. Bullock
Assistant Professor
Bush School of Government and Public Service
1034 Allen Building
4220 TAMU
College Station, TX 77843
(979) 458-8032
36
Reports from
For a full listing of IBM Center publications, visit the Centers website at www.businessofgovernment.org.
Recent reports available on the website include:
Acquisition
Ten Actions to Improve Inventory Management in Government: Lessons From VA Hospitals by Gilbert N. Nyaga, Gary J.
Young, and George (Russ) Moran
Beyond Business as Usual: Improving Defense Acquisition through Better Buying Power by Zachary S. Huitink and David
M. Van Slyke
Collaborating Across Boundaries

Effective Leadership in Network Collaboration: Lessons Learned from Continuum of Care Homeless Programs by Hee
Soun Jang, Jess N. Valero, and Kyujin Jung
Inter-Organizational Networks: A Review of the Literature to InformPractice by Janice K. Popp, H. Brinton Milward, Gail
MacKean, Ann Casebeer, and Ronald Lindstrom
Improving Performance
Leadership, Change, and Public-Private Partnerships: ACase Study of NASA and the Transition from Space Shuttle to
Commercial Space Flight by W. Henry Lambright
Building Performance Systems for Social Service Programs: Case Studies in Tennessee by Patrick Lester
Innovation
A Playbook for CIO-Enabled Innovation in the Federal Government by Gregory S. Dawson and James S. Denford
Making Open Innovation Ecosystems Work: Case Studies in Healthcare by Donald E. Wynn, Jr., Rene M. E. Pratt, and
Randy V. Bradley
Leadership
Best Practices for Succession Planning in Federal Government STEMM Positions by Gina Scott Ligon, JoDee Friedly, and
Victoria Kennel
Risk
Ten Recommendations for Managing Organizational Integrity Risks by Anthony D. Molina
Managing Risk, Improving Results: Lessons for Improving Government Management from GAOs High-Risk List by
Donald F. Kettl
Using Technology
The Social Intranet: Insights onManaging andSharing KnowledgeInternally by Dr. Ines Mergel
Using Mobile Apps in Government by Sukumar Ganapati
Creating a Balanced Portfolio of Information Technology Metrics by Kevin C. Desouza
About the IBM Center for The Business of Government
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2017

Risk Management and Reducing

Robert A. Greer Justin B. Bullock

Risk Management and Reducing

IBM Center for The Business of Government

Professors Greer and Bullock detail DOLs innovative approach

Daniel J. Chenok Dennis R. Kaizer

IBM Center for The Business of Government

Section Five, Descriptive Analysis of Improper Payments in Unemployment Insurance,

Recommendation One: Establish clear metrics for measurement and evaluation.

Recommendation Three: Provide relevant and timely information to stakeholders.

IBM Center for The Business of Government

The Unemployment Insurance program is a jointly administered federal-state program that

Federal Improper Payments

Risk Management and Organizational Performance

IBM Center for The Business of Government

Goal and Objectives of Report

IBM Center for The Business of Government

Improper Payment Legislation and

The methods used by the agency to recover improper payments

Legislation Related to Improper Payments

Improper Payments Information Act (IPIA) of 2002, Improper Payments Elimination

IBM Center for The Business of Government

IBM Center for The Business of Government

Case Study: Reducing Improper

Strategies Used by the DOL Unemployment Insurance Program via

IBM Center for The Business of Government

Strategy One: Developing UI Performance Measures

Strategy Two: Developing the National Directory of New Hires

Strategy Three: Increasing Messaging with Claimants and Employers

IBM Center for The Business of Government

Strategy Four: Increasing Collaboration with High-Impact States

Strategy Five: Providing Supplemental Funding

Strategy Six: Developing a State Information Data Exchange

Strategy Seven: Developing State Quality Service Plans

Strategy Eight: Creating an Unemployment Insurance Integrity

IBM Center for The Business of Government

A secure portal for communicating fraud schemes in the UI program

Assessment of the Eight Strategies

Based on our review of the strategies, we found the following:

IBM Center for The Business of Government

Texas Workforce Commission

Impact of Efforts to Reduce Improper Payments in Unemployment

IBM Center for The Business of Government

Trends in Reducing Payments

Figure 1: Average State Improper Payment Rates 20042015

Improper Payment Rate Lower/Upper Bounds

Figure 2: State Overpayments from BYE 20042015

Percentage of Overpayments from BYE lb/ub

IBM Center for The Business of Government

Figure 3: Percentage of Overpayments from Separation Issues 20042015

Percentage of Overpayments from Separation

Percentage of Overpayments from Separation lb/ub

Figure 4: Percentage of Overpayments from Work Search 20042015

Percentage of Overpayments from Work Search lb/ub

Reducing Improper Payments for Root Cause Four: Failure to Register

Figure 5: Percentage of Overpayments from ES 20042015

Overpayments from ES Registration Lower/Upper Bound

IBM Center for The Business of Government

Recommendation One: Establish clear metrics for measurement and evaluation.