The error led to the mailing of about 648,100 notices to claimants who had to recertify their eligibility this summer and were warned they may have to pay back the money they'd received. The Department of Labor later granted waivers to those who were overpaid because of the state error.
The audit estimated at least $3.9 billion in overpayments was paid to 347,437 claimants who were later deemed ineligible — money that likely will not be recouped "because the improper payments were the UIA's fault." Auditors said the agency still is tallying the overpayment total and it likely exceeds the $3.9 billion estimate.
The agency has paid a total of $39 billion in unemployment aid to 3.5 million Michigan residents since March 2020.
Gray, according to the audit, prepared a slide show in April 2020 that showed the pros and cons of "paying ASAP and establishing eligibility in parallel" and shared the presentation with senior staff in the UIA and Department of Labor and Economic Opportunity as well as the Executive Office of the Governor.
"The slide deck identified the risk of overpayment to workers who would not be eligible because they quit or were not previously working as reasons against paying as soon as possible," the audit said. Another slide indicated the state likely wouldn't have to reclaim federal benefits paid in error if that was the case.
"The slide deck also stated, 'This means we have a choice between speed and overpayment risk' and identified the relevant population at 190,000 claimants at the time," the audit said.
The end result of the eligibility criteria decision was that the agency's process allowed "individuals without any prior attachment to the workforce and who may have been unemployed for reasons unrelated to COVID-19" to be paid federal benefits, the audit said.
While the audit noted Gray notified senior officials of the risk, it also noted the former director was known to make decisions "unilaterally." Gray resigned from his position in November 2020.
In a statement Thursday, Unemployment Insurance Agency Director Julia Dale said the agency appreciated the audit's findings and had already been working to correct some of the issues leading to those findings prior to the audit.
"The audit looked back at our operations at a time when, as a consequence of the pandemic, the agency was standing up new and complicated federal programs while processing hundreds of thousands of claims every week, shifting nearly our entire staff to remote operations, and simultaneously responding to unprecedented levels of sophisticated, criminal efforts to defraud the agency," Dale said.
Michigan Rep. Steve Johnson said in a Thursday statement that "rampant ineptitude" at the Unemployment Insurance Agency led to delays and confusion for many Michigan residents forced out of work during the pandemic. The Wayland Republican, who has held a series of hearings before the House Oversight Committee on UIA challenges, said he hopes the agency can improve.
"These findings provide concrete proof that a pivotal arm of Gov. Whitmer's administration failed when people needed it most," Johnson said. "This was a state mistake with their criteria, not a mistake made by claimants. Worse yet, UIA continued down a path they were told was incorrect. "
Thursday's audit found the agency was unable to explain its rationale for including eligibility requirements with no link to federal guidance or why it didn't fix the issue when the U.S. Department of Labor identified it in June 2020, the audit said.
At that time, in June 2020, the U.S. Department of Labor notified the agency of "urgent" and "critical" issues involving the unauthorized criteria it developed and its failure to require claimants to self-certify their reason for unemployment, according to the audit.
"UIA continued to include the four unauthorized eligibility criteria on its forms and sent conflicting documentation to the USDOL," the audit said. "On July 1, 2020, UIA indicated it removed the unauthorized eligibility criteria, and on July 16, 2020, UIA indicated it had not."
The federal department told auditors it approved the state agency's PUA process on July 17, 2020 "under the impression that UIA was reviewing the non-COVID-19 reasons for eligibility. However, UIA was not.
The federal department notified states again in September 2020 that they needed to correct issues with eligibility and UIA began to process changes but continued to include the four unauthorized eligibility criteria through March. The state removed the criteria after a Jan. 6 meeting with federal officials regarding a review they'd performed of the state system.
The state agreed with the Thursday audit's findings but stressed that the development of the criteria came at a time of immense workload for the agency as it juggled with historic claims, attempted to stop overwhelming attempts at fraud and implemented the federal programs.
The agency said it has corrected eight of the 11 findings revealed in January after the federal review, according to the audit.
In all, the audit deemed the agency's efforts "not effective" and found two material conditions, or serious findings, including an inappropriate "tone at the top" when it came to internal controls for pandemic unemployment assistance; and the establishment of incorrect eligibility criteria and delays in corrective action.
"UIA informed us that it bypassed established procedures requiring approvals from key UIA personnel when developing its PUA application and certification critieria due to the urgency to make the application available in response to the pandemic," the audit said.
The agency did not document what process was used to develop the criteria and "was unable to demonstrate who was involved with the decisions and any rationale to inappropriately expand PUA eligibility criteria," the audit said.
The report released Thursday is the first of four the Office of Auditor General plans to release in the coming months.
The next report, due in early 2022, will assess the agency's handling of claims during the pandemic and their communication with claimants during that time.
Other reports will look at the agency's personnel management during the pandemic and security and controls related to the agency's claims processing and management software.
The Detroit News previously reported the feds warned Michigan and other Midwest states in May 2020 that some states had "seriously cut corners" on implementation of the pandemic unemployment assistance, a jobless program for individuals who didn't qualify for typical unemployment.
Federal regulators in a December review of the state's program found Michigan, in developing its PUA program in Spring 2020, had included four qualifiers for assistance that were not authorized under the CARES Act. The state also had excluded three qualifiers that should have been available to people applying for PUA money.
Federal officials told top UIA staff in January of the issue and issued formal notice in February.
The state waited until late June to begin issuing nearly 648,100 notices to claimants who had to re-certify under the new criteria and possibly pay back the money they'd received — setting off a wave of confusion and panic among claimants. Whitmer said she'd seek waivers for all those impacted by the agency error.
Emails released to The News on Tuesday indicate federal regulators reached out to the state of Michigan on March 30, May 25 and July 12 reminding the state of the incorrect qualifiers and asking for updates on whether the qualifiers were corrected.
The March 30 and May 25 emails asked for additional documentation to show the state had removed the unapproved qualifiers and identified how many claims were affected. The July 12 emailed check again on the updates and the state's work to rectify the issue.
"The 45-day response was due Friday, July 9, 2021," wrote Jeffery B. Haluska, an unemployment insurance program specialist for the U.S. Department of Labor.
"What is the status of the outstanding findings?" he asked.
The state replied that it would work to provide him an update that day.
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