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'A dinosaur' – the pandemic exposed longstanding flaws in Virginia's unemployment system
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'A dinosaur' – the pandemic exposed longstanding flaws in Virginia's unemployment system

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Virginia Employment Commissioner Ellen Marie Hess knew the state’s unemployment insurance system faced a potential reckoning when she and her top deputy met with their new boss, then-Secretary of Commerce and Trade Todd Haymore, more than five years ago.

It was a routine briefing for the new secretary by Hess, who had been appointed commissioner the previous year by Gov. Terry McAuliffe, but Haymore was startled by her candid assessment of the system’s vulnerabilities.

“They told me, this is what you need to know: If times turn bad, we’re going to react to it, but we’ve been underfunded,” he said.

That was April 2016 — when Virginia’s unemployment rate was 3.9%, the first time it had fallen below 4% since the Great Recession hammered the state’s economy in 2008.

Four years later, times turned bad abruptly, when the COVID-19 public health emergency declared by Gov. Ralph Northam forced many businesses to shut down. Unemployment, at a historic low of 2.6% in March 2020, peaked at 11.3% the next month, as more than 400,000 Virginians lost their jobs.

“I certainly was not foreseeing a pandemic,” Hess said in a recent interview. “We were thinking about recession.”

The pandemic has laid bare the fatal flaws of Virginia’s unemployment system, with tens of thousands of unemployed state residents caught in a twilight zone for receiving benefits they desperately need to survive the loss of their jobs in the midst of a public health emergency that turned the economy upside down.

The calamity exposed an agency, the Virginia Employment Commission, that had long been underfunded and overlooked, with an antiquated information technology system and a bare-bones staff to resolve complicated cases and answer questions from unemployed Virginians suddenly thrown into a frayed safety net.

“It’s a dinosaur,” said Annette Sutton, 57, a Norfolk resident who has been afraid to return to work as a home health aide because of her own compromised health, including a stroke in 2013 that left her partially disabled.

Sutton is vaccinated against COVID-19 and she knows “jobs are out there,” but she’s been afraid to go back to caring for others because of her medical vulnerability. She also doesn’t want to return to work until she receives employment benefits she lost without explanation almost four months ago — $102 a week from the state, plus the enhanced federal benefit of $300 — so she can repay money she borrowed from others to pay bills.

The employment commission contacted her and resolved her case on Friday afternoon, ending months of frustrated effort.

“We got everything cleared and I should get a deposit in 48 hours,” Sutton said in an email. “GOD IS GOOD!!!!!”

The VEC, faced with more unemployment claims in 15 months that it had the previous 10 years, performed well with the uncomplicated cases during the pandemic, providing benefits within 21 days in about 85% of cases — sixth-best in the country, according to the U.S. Department of Labor.

But the agency has struggled with complex cases — the ones in which people may not be eligible for the benefits they claim, or those involving potential fraud — as well as a new set of temporary unemployment benefits approved by Congress last year in emergency legislation to help people survive the economic meltdown triggered by government restrictions to combat COVID-19.

The new federal benefits included aid to self-employed and “gig” workers who weren’t eligible for traditional unemployment benefits. In order to give them the new benefits, the VEC first had to deny eligibility under the state system.

“That was really just extra work that delayed things and jammed up the system,” said VEC spokeswoman Joyce Fogg.

It was a challenge for unemployment systems across the country, according to a new audit report by the Office of the Inspector General at the U.S. Department of Labor. The report, issued on May 28, found that the federal agency and states had struggled to implement the new programs and benefits.

“This occurred primarily because states’ information technology systems were not modernized, staffing resources were insufficient to manage the increased number of claims, and according to state officials, guidance from [the federal government] was untimely and unclear,” the report states.

Virginia wasn’t among the 12 states sampled for the inspector general audit report, but its unemployment system suffered from the same problems.

The Joint Legislative Audit and Review Commission — the state watchdog agency for the General Assembly — this year began a study of the VEC. JLARC staff told legislators last month that the agency had processed just 2.4% of complex cases within 21 days through the end of March. The average length of claims under appeal was 247 days — more than eight months, compared to the federal standard of less than a month.

The federal labor department ranked Virginia’s response to disputed claims last in the country, although the state challenges the reliability of data cited for other states.

In late May, a federal judge approved a settlement of a class action lawsuit filed against the VEC by five Virginia women who said the agency had failed to provide them either benefits or explanations for months.

The settlement did not determine whether the plaintiffs were legally eligible for benefits, but it requires the state to resolve their cases along with those of more than 92,000 unemployed Virginians by Labor Day. That number did not include more than 82,000 similar cases the state had already addressed in the previous month.

At the same time, Northam issued an executive directive ordering a series of steps to clear the backlog and bolster the unemployment system, with a commitment of $20 million to pay for it from a combination of funds already appropriated in the state budget and money from the agency’s administrative accounts.

The settlement does not address disputed claims and appeals that the state expects to receive after reinstating a requirement that people document at least two job searches each week to receive unemployment benefits.

Virginia suspended the work search rule after the pandemic began, but reinstated it this week at the urging of President Joe Biden to move people back into a labor force that urgently needs workers. Unemployed Virginians will have to certify the job searches when they file their weekly report, beginning on Sunday.

But the problems at the VEC have deeper roots, based on the way the system is funded. Prior to the pandemic, a long period of low unemployment in Virginia had sapped the VEC’s funding.

The money comes from payroll taxes paid by Virginia employers to the federal and state governments. The state’s share of employer payroll taxes goes into the Virginia Unemployment Trust Fund, which pays benefits, but Virginia relies on money returned by the federal government to pay the cost of running the state system.

The Federal Unemployment Tax Act directs part of the federal share go back to states based on their administrative costs. That funding goes down when unemployment is low and up when it’s high. What’s more, Virginia gets far less back, per capita, than neighboring Maryland and other states with higher costs under the federal formula, which rewards some states at the expense of others.

“There are donor states and there are receiving states,” said Hess, the employment commissioner. “Unfortunately, the way the system works, we don’t get back as much as we pay in.”

For example, Virginia, with a population of 8.5 million, currently receives $32.6 million, or 39% of what state employers pay in federal payroll tax. Maryland, with 6 million people, gets $44.5 million, or 61%.

“It does not cover actual costs to run the programs,” said Megan Healy, the governor’s chief workforce adviser, who will become Virginia’s first secretary of labor on July 1.

Previous cutbacks in federal funding forced the VEC to lay off staff, leave vacant jobs unfilled, cut back hours, close buildings and delay a project begun in 2009 — 12 years ago — to modernize a computer system from the mid-1980s so that people seeking unemployment benefits could file and track their claims.

The agency generally receives no state funding for its overhead expenses, but the state helped the VEC move from its dilapidated headquarters offices in downtown Richmond to leased space in western Henrico County. The process began in the last year of the McAuliffe administration and was completed at the end of Northam’s second year in early 2020.

Chief Deputy Jeff Ryan, who came to the VEC from another state agency, said Northam personally witnessed conditions at the old headquarters on West Main Street, where a blue tarp hung from the ceiling to collect water that ran through a garden hose to a trash can.

“There was just a total different level of unacceptable,” Ryan said.

The VEC does not depend on Virginia’s general fund budget, financed by state income, sales and other taxes, which is one reason it’s overlooked.

“It’s easy to ignore them,” said former Sen. John Watkins, R-Powhatan, a previous chairman of the assembly’s Commission on Unemployment Compensation.

This year, however, the General Assembly budgeted $10 million to help the agency’s overwhelmed customer service system and $5 million to accelerate completion of the IT modernization project. It also provided $19 million to compensate the VEC for money it overpaid people who, under a new state law, won’t have to pay it back if they don’t have the financial means.

“It’s not just the federal government — it’s been chronically underfunded by the state,” said Sen. Creigh Deeds, D-Bath, a member of the Senate Finance and Appropriations Committee. “We’ve gone on the cheap for unemployment for too damn long.”

“My people are sick and tired of it,” Deeds said.

The Commission on Unemployment Compensation, including legislators from the House of Delegates and the Senate, has met just twice since the pandemic began, the last time in December.

The eight-member panel is charged under state code with monitoring the unemployment compensation program and its effectiveness, and protecting the Virginia Unemployment Trust Fund, financed by employer payroll taxes to pay benefits.

***

“The only people who can hold the state accountable is the General Assembly, and I have yet to see any leadership on their part,” said Eric Johnson, 36, a Loudoun County resident who was laid off from his job at a Northern Virginia think tank in mid-January.

Johnson, who is married with three children, said he has filed weekly claim reports for more than four months but has yet to receive any unemployment compensation or answers about the status of his case.

“I don’t know about the rest of the state, but my family needs to eat more often than once every four months, and my mortgage and power bill are due every single month,” he said in an email.

Del. Lamont Bagby, D-Henrico, chairman of the legislative commission, said the panel will meet on Thursday to discuss the unemployment system’s problems “and get some clarity on how we’re going to put [unemployed] people in a better position.”

Del. Sally Hudson, D-Charlottesville, a labor economist and a member of the panel, was blunt. “The commission could be doing a lot more,” she said.

Hudson wants Northam to make the unemployment system an urgent priority, as he did when he appointed Dr. Danny Avula as coordinator of Virginia’s COVID-19 vaccine rollout after a slow launch.

“Where is the energy to treat this problem the same?” she asked.

Northam has intensified the state’s response by making Healy its public leader this year, even though the VEC won’t become her direct responsibility until July 1.

“One hundred percent of my job now is to oversee that,” Healy said last week.

Del. Lee Ware, R-Powhatan, a member of the commission and former chairman, said the VEC deserves credit for dealing with “an unprecedented number of claims for months on end.”

“Our best response is to ensure that honest applicants receive the funds they need — and deserve — as soon as possible, and map a plan that guarantees ... that the agency is equipped to deal effectively with even a remotely similar circumstance in the future,” Ware said.

Another member, Sen. Adam Ebbin, D-Alexandria, sympathized with the VEC, but is outspoken about the plight of unemployed constituents.

“It’s very clear that there are people in Virginia who are hurting, who need help from the VEC,” Ebbin said.

It is “unfortunate the way they’re funded,” he said. “But it is a core function of government to compensate people for unemployment. When they need the benefits, they really need the benefits. It’s not something that can be slow-walked.”

For example, the VEC has been slow to resolve and pay claims in cases involving potential fraud or stolen identity, which the agency has told Annette Sutton — the home health care worker — was the reason for her sudden loss of unemployment benefits in late February.

The money was being paid to a bank account that wasn’t hers, but she learned about it only after contacting the VEC for an explanation of why her benefits had stopped.

“They minimized the fraud,” she said.

***

Russel Sarber, 51, of Poquoson, had a similar story about the application he filed for unemployment benefits in early March. It was his second request for help from the VEC, but the experience was far different from the first one more than a year ago, when he promptly received benefits after losing his job at a Hampton Roads recycling company just before the pandemic.

The benefits from the initial claim ended in September, and Sarber tried to start a used auto parts salvage business in Norfolk. It was a gamble that failed, Sarber said, so he filed for benefits again in the first week of March. After receiving a notice of how much money he was eligible to receive, he said he heard nothing from the agency.

His calls and emails were unanswered.

“It was hard getting through to somebody,” he said, a common problem according to state legislators whose offices have been inundated with complaints about the VEC.

Sarber said he turned to his state senator, Senate Minority Leader Tommy Norment, R-James City, for help. A VEC employee contacted him last week about his case, which also apparently had been held up because of stolen identity.

“The information was correct, but the address was wrong,” Sarber said.

The VEC estimates that it has paid about $59 million in suspected fraudulent unemployment claims, out of more than $13 billion in federal and state unemployment benefits it has distributed to Virginians during the pandemic.

The agency’s website outlines a process for reporting unemployment insurance fraud, but warns that the victims may not hear much about the outcome while it’s being investigated.

Healy said the VEC responded in March to a rash of stolen identity cases. It stopped the thefts and verified that no one had breached the system from the outside, but it’s still investigating the cause and trying to track down stolen money.

In other cases, she said what looks like fraud is simply a mistake on an application — an incorrect Social Security number or address.

However, the expansion of federal benefits to people who are self-employed or “gig” workers has made it harder for the VEC to verify information through employers. About 80% of claims involve people who work for employers already covered by the system, but about 20% represent people who would not have been eligible for benefits in the past.

“It really opened a large door for fraudulent activity,” she said.

But Sarber said he wouldn’t have known about the apparent identify theft if he hadn’t demanded answers about his benefits.

“With fraud, they don’t even contact you,” he said. “It just lays dormant.”

Even if his case is still under investigation, Sarber said he desperately needs his unemployment benefits, with no chance of returning to his old job.

“I’m broke — zero,” he said, adding that he’s sold his vehicle and other belongings. “I have nothing else.”

The agency has added a net 300 employees, after accounting for 220 who left during the pandemic. It had only eight people to adjudicate disputed claims when the pandemic began. Now, it employs 110 and has contracted with a private firm to supply up to 300 more, as part of Northam’s executive directive and the federal lawsuit settlement.

“If we’re hearing this every day, the number of people who are struggling is vast,” Hudson said. “I don’t know how you hear the stories we hear every day and not want to do more.”

Fogg, at the VEC, acknowledged, “Our biggest problem is communicating back to individuals.”

Similarly, the VEC employed about 50 people at customer service call centers when the pandemic began. Now, it employs about 700, many of them under private contract in response to the emergency.

“It’s people, that’s what we need,” Hess said.

The pandemic also has taken a toll on the VEC and its nearly 1,200 employees. Two have died from COVID-19 in 12 outbreaks at VEC offices, which were closed to the public after the health emergency began. Another died of a heart attack.

“We had the same fears as everybody else,” Fogg said.

Hess said employees have been subjected to verbal abuse and threats, including warnings that identified their homes as targets. “They are essential, front-line workers,” she said.

The volume of unemployment claims filed during the pandemic is unprecedented. The agency has received more than 1.6 million claims, including 140,000 in one week, which was more than what was submitted in the entire year of 2019.

“We went from zero to a thousand miles per hour in three days,” said Ryan, chief deputy at the VEC.

***

The volume of claims prompted the VEC to put on hold the completion of the third phase of its IT modernization project, which would have given consumers direct access to their accounts and the ability to track any dispute over their eligibility for benefits.

“It felt too risky to have a major system go live in the middle of the pandemic,” Hess said.

As a result of suspending the project, however, the agency continues to rely on a mainframe computer system installed in 1985. It doesn’t allow people to reset their passwords or provide access to case files for customer service employees at the call centers that the VEC operates itself or under contract.

“They don’t have the information to know if they can share it,” Healy said of the call center operators. “It’s very frustrating.”

The IT problem is not new to legislators.

“I was concerned several years ago that we were operating on a 20th-century system that did not relate to today’s world,” said Sen. Frank Ruff, R-Mecklenburg, former chairman of the Virginia Workforce Development Board.

The IT modernization project began in 2009, the last year of then-Gov. Tim Kaine’s term, and has proceeded slowly under both Republican and Democratic governors, and legislatures controlled by both parties, even though the state has received more than $60 million in federal funding for a new system.

“I think there was a lack of urgency, maybe, in previous administrations to get it done,” said Ryan at the VEC.

Watkins, the former senator who retired in 2016 after 34 years in the assembly, said he was pushing the modernization project a decade ago.

“They’ve never gone through with the upgrade they needed to do,” he said. “There’s no excuse for it.”

U.S. Sen. Mark Warner, D-Va., also voiced frustration over Virginia’s unemployment insurance system in a letter to Northam in late March.

The letter outlined a series of specific steps for Virginia to address the delays in processing unemployment claims. He also suggested ways to get help with the IT system from nonprofit and federal organizations to “modernize and streamline the payment process,” as Wisconsin and other states have done.

Hudson, as a member of the legislative commission, said the state had not taken advantage of those opportunities. “We’re kind of hunkered down,” she said.

Healy, in the governor’s office, said the state is focused on completing the modernization project by Oct. 1, as Northam ordered in his executive directive last month, and then would be interested in working with outside organizations to improve its operation. “It’s a timing thing,” she said.

The General Assembly also will have a chance to address the VEC’s needs when it meets in special session this summer to decide how to spend $4.3 billion in federal aid that it will receive under the American Rescue Plan Act signed by Biden on March 11.

But Ruff, a conservative Republican senator, and Hudson, a progressive Democratic delegate, agree that the VEC also needs a different mindset as it looks for solutions to the system’s problems, whether in bolstering the workforce or modernizing its computers.

“I think it’s an agency that has been left a quarter-century behind,” Ruff said. “Not only the technology, but the mindset of what we are doing, what should we be doing and how do we do it better?”

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