From Spotlight Delaware: Experts says ‘Unauditable’ Delaware unemployment fund brings risk

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By Karl Baker

This story was produced by Spotlight Delaware, a community-powered, collaborative, nonprofit newsroom covering the First State. Learn more at spotlightdelaware.org 

Why Should Delaware Care?
Thousands of laid off Delaware workers turn to the state’s unemployment office for weekly checks every year, expecting money that they and their employers had paid into the system to be there. An auditor’s report last week cast doubt on the management of the overall system. Yet, while the unemployment office has not properly kept records of cash moving into and out of the fund, the system appears sizable enough to handle any potential flood of new claims.  

Delaware’s hefty unemployment insurance fund appears to be poorly managed, in need of more staff, and may not be able to track companies that fail to pay into the system, according to a panel of national accounting experts.

But, it does not appear to be at risk of failing to pay jobless claims in the near future. 

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Spotlight Delaware interviewed three accounting professors to gauge their reactions to a report from Delaware’s auditor that called the state’s unemployment insurance fund – currently estimated at $344 million – “unauditable.”  

It was a grave report card for a key part of the government that serves as a financial backstop for tens of thousands of workers in the state.

The report, which relied on an investigation from an outside accounting firm, concluded that officials within the Delaware Division of Unemployment Insurance couldn’t verify how certain dollars had flowed through the fund, and had even stopped their own internal audits on parts of the system last year. 

Those problems followed others identified in previous years within the unemployment division, and came even as the state had been paying consultants to reform how the multi-million-dollar pot of money is managed. 

The auditor’s report also came amid a series of notices about other administrative blunders within the state government. In late March, a federal watchdog stated that Delaware’s Medicaid office had paid monthly premiums to health care companies on behalf of people who had already died.  

Weeks before that, Delaware’s pension office stated that it needed to drastically change how it pays retired legislators, after learning that a law passed in 1997 governing their pension payouts “was never codified.”    

When asked for reactions to last week’s auditor report, the accounting experts each noted that such faulty recordkeeping could mean that unemployment officials won’t know if a Delaware company is failing to pay its share into the state fund. 

“We know what’s in the bank, but we don’t know what’s owed by whom and to whom,” said Irfan
Bora, a professor of governmental accounting at Rutgers University. 

Michael Granof, an accounting professor at the University of Texas, pointed to a section of the auditor’s report that noted that state officials’ determination of whether a company is “doubtful” to pay into the system is flawed.  

“It means you can’t rely on the financials,” Granof said. 

And, Justin Marlowe, a professor of public finance at the University of Chicago, said such poor management can leave the unemployment system vulnerable to cyber attacks. 

It could also impact Delaware’s credit rating, which determines the cost the state must pay to borrow money, he said. 

Though the unemployment fund has a lot of money, credit rating agencies judge governments based on what the industry calls “internal controls,” he said. 

“A government can have all the resources in the world, and all of the political leadership and all of the policy priorities completely aligned, but if there’s no effective management to actually execute that plan, then none of that matters,” said Marlowe, who also serves as director of the Center for Municipal Finance.

Still, Bora noted that the size of Delaware’s unemployment fund was substantial, meaning it’s likely to keep paying jobless Delawareans in the near term, even if a flood of new claims come amid a future economic downturn. 

“It’s not like it’s bankrupt,” Bora said. 

The unemployment office’s response

On Tuesday, the head of Delaware’s unemployment insurance division acknowledged that his office was not able to answer certain questions from outside auditors about “specific payments” his office had made – leading to the “unauditable” conclusion.

Delaware State Auditor Lydia York | PHOTO COURTESY OF AUDITOR’S OFFICE

“We just weren’t able to get through that entire process in time before that report was issued,” said Daryl Scott, director of the Division of Unemployment Insurance at the Delaware Department of Labor.

Asked whether he can verify that Delaware companies are properly paying into the system, Scott said his office has records of what companies owe, based on their self reporting of unemployment tax. 

Traditionally, Scott’s office audits “a certain number” of those self reports, but he indicated that those oversight activities have dwindled.  

“The auditing function – that’s an area where we had high turnover during the pandemic and we’re rebuilding that team as well,” said Scott, while noting that finding qualified accountants has been challenging. 

But, she also noted that the federal government has provided Delaware with cash to reform and upgrade the unemployment division’s management of the hundreds of millions of dollars that sit in the fund for jobless Delawareans.

Scott said the origin of much of the problems in his division began during the COVID pandemic response, when the federal government piled a dozen new programs and large pots of money onto his office to manage.

Finally, he stressed that the total amount of money within the unemployment fund is accurately reported. And, it’s also substantial, he said, after Gov. John Carney recently injected $240 million from federal COVID relief money into the fund.

“We have bank records,” he said.

A spokesman at the Delaware of Labor said the unemployment fund currently sits at $344 million, down from $385 million last June. 

While Scott pointed to COVID as one reason for his office’s faulty finances, Delaware State Auditor Lydia York challenged that premise. In her report last week, York said the stresses from the pandemic do “not excuse the failures of management that followed.” 

In a subsequent interview Tuesday, York also questioned whether the record keeping “anomalies” have allowed some Delaware companies to not properly pay into the system. 

Finally, York agreed with Scott that his office needs more accountants, even as it is a particularly challenging time to hire them. 

Read the entire report from State Auditor York below.

“I really remain hopeful that we will be able to sort this out with enough time,” she said.

DOLUI-Final-Report-2024Download

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