Performance audit, Department of Economic Security, Division of Employment and Rehabilitation Services Unemployment Insurance Program

              Debra K. Davenport
Auditor General
Department of
Economic Security
Division of Employment and
Rehabilitation Services—
Unemployment Insurance Program
Performance Audit Division
JANUARY • 2005
REPORT NO. 05 – 01
Performance Audit
A REPORT
TO THE
ARIZONA LEGISLATURE
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
Audit Staff
Shan Hays, Manager and Contact Person
Jessica Tucker, Team leader Bruce Coleman
Mark Haldane
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
January 19, 2005
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. David A. Berns, Director
Department of Economic Security
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Department of
Economic Security, Division of Employment and Rehabilitation Services—Unemployment
Insurance Program. This report is in response to a November 20, 2002, resolution of the Joint
Legislative Audit Committee and was conducted as part of the sunset review process prescribed
in Arizona Revised Statutes §41-2951 et seq. I am also transmitting with this report a copy of the
Report Highlights for this audit to provide a quick summary for your convenience.
As outlined in its response, the Department of Economic Security agrees with all of the findings
and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on January 20, 2005.
Sincerely,
Debbie Davenport
Auditor General
DD:jw
Enclosure
Services:
The Department of Economic Security (Department) provides
temporary financial assistance to workers who lost their jobs
through no fault of their own. The Division of Employment and
Rehabilitation Services (Division) operates the Unemployment
Insurance (UI) program. Employers meeting certain criteria
pay state and federal UI taxes. State UI tax revenues fund UI
benefits that are paid out to qualifying claimants, and federal
UI tax revenues fund the administrative costs of the state UI
program. State statutes establish the eligibility requirements
for the payment of UI benefits. The UI program involves two
major functions:
􀁺􇩕 UI Call Centers—Determining UI program eligibility
and authorizing benefit payments to eligible unem-ployed
workers.
􀁺􇩕 UI Employer Tax Administration—Collecting unemploy-ment
taxes, determining tax liability and tax rates for
employers, and obtaining employee wage information
from employers. The UI program also collects the job
training tax, which funds the Arizona Job Training
Program administered by the Department of
Commerce.
Facilities and equipment:
The Division uses office space at 17 locations state-wide to
administer the UI program. Twelve locations are leased by the
Division, including two call centers located in Phoenix and
Tucson, and an adjudications office in Yuma. The total month-ly
cost of leases associated with the UI program is $109,752,
and the monthly operating costs, such as utilities and land-scaping,
total $11,661. The remaining five locations are state-owned.
The Division owns a variety of standard office equipment that
is used to administer UI functions, such as computer equip-ment,
furniture, copiers, and fax machines. The Division also
operates several mainframe computer systems to administer
PROGRAM FACT SHEET
Arizona Department of Economic Security
Division of Employment and Rehabilitation Services—
Unemployment Insurance Program
Office of the Auditor General
Program staffing:
692 FTE as of August 2004 (including 253 vacancies)
Program activity:
Special Programs
Permanent - 35
Temporary - 19
Systems Development/
Technical Support
Permanent - 30
Temporary - 6
Tax
Permanent - 178
Temporary - 21
Call Centers
Permanent - 143
Temporary - 170
Other
Permanent - 43
Temporary - 47
Permanent Employees Temporary Employees
Dollars (in Millions)
$0
$200
$400
$600
$800
$1,000
$1,200
1999 2000 2001 2002 2003 2004
Employer Contributions Benefits Paid Trust Balance
Years ended June 30, 1999 through 2004
the collection of UI taxes and the distribution of UI benefits, as well as a voice response system
that was implemented in the UI call centers. In addition, the UI program uses 22 vehicles, which
are department-owned.
Mission:
The mission of the UI program is “to collect taxes from covered employers and to pay benefits to
eligible unemployed workers.”
Goals:
The UI program has adopted the following goals:
1. To increase the degree of timeliness in paying UI benefits.
2. To improve efficiency and recovery of fraud overpayments.
3. To ensure that sufficient funds are available to meet UI payment needs.
Adequacy of goals and performance measures:
The UI program’s goals and performance measures appear to be generally aligned with its mis-sion.
However, auditors found opportunities to improve the program’s performance measures.
Although the UI program has established measures for ensuring the timeliness of administering
certain UI services, the Division should also consider establishing measures that address the
quality of UI services. The United States Department of Labor has established measures that are
intended to ensure that claimants and employers receive high-quality UI services. The Division
should consider incorporating some of these measures, such as benefit payment accuracy, into
its goals and performance measures.
Finally, the UI program should consider establishing some customer satisfaction measures.
Source: Auditor General staff compilation of audited information from the State of Arizona Comprehensive Annual Financial Report for the years
ended June 30, 1994 through 2003; audited financial schedules prepared by the Department for the year ended June 30, 2004; and
unaudited information obtained from the Department’s UI program Web site; the Department’s UI program strategic plan for state fiscal
years 2005 through 2007; department occupancy information reports as of August 31, 2004; the Department’s annual report for state
fiscal years 2002 and 2003; the U.S. Department of Labor’s UI PERFORMS annual report for calendar year 2002; Arizona Revised
Statutes; and other information provided by the Department, including FTEs as of August 19, 2004.
State of Arizona
Facilities and equipment (concl’d)
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Economic Security’s Unemployment Insurance (UI) program
administered by the Division of Employment and Rehabilitation Services (Division)
pursuant to a November 20, 2002, resolution of the Joint Legislative Audit
Committee. This is the second in a series of reports of the Department of Economic
Security (Department) and was conducted as part of the sunset review process
prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq. The first audit
reviewed the Department’s welfare programs (Auditor General Report No. 04-02).
The remaining audits will include reviews of the Department’s information technology
and its service integration initiative, and the Division of Developmental Disabilities’
fiscal intermediaries program. The final report will be an analysis of the 12 statutory
sunset factors.
The UI program is a federal program overseen by the U.S. Department of Labor
(DOL) and administered by the states. Employers pay federal and state
unemployment insurance taxes, and these taxes are used to administer the program
and pay benefits. Claimants must have had sufficient earnings and must meet other
requirements, such as actively seeking work and being unemployed through no fault
of their own, to receive unemployment benefits.
Division should improve eligibility determination accuracy
(see pages 13 through 19)
The Division’s accuracy rate in determining whether claimants are eligible for UI
benefits is significantly below DOL standards and national averages. Division staff
determine claimants’ eligibility for UI benefits. The Division measures the accuracy of
these determinations through two federally required quality control review programs.
One review, which is done quarterly, focuses on the eligibility determination process
and found that the Division’s accuracy rate in 2003 was only 43.1 percent, compared
to DOL’s standard of 75 percent. The national average for that review was 71 percent
in 2003. The second review, which is done annually, estimates overpayments and
found Arizona’s overpayment rate in 2003 was about 22 percent, the third highest in
Office of the Auditor General
SUMMARY
page i
the United States. DOL does not set a standard for the overpayment estimate.
Several factors should be addressed in order to improve the Division’s high error
rates:
􀁺􇩔 The Division does not regularly use data from its overpayment review to help
identify and reduce errors, although the review shows the causes of errors and
who is responsible for overpayments. To help reduce errors, the Division should
analyze this review data and use the results to train staff.
􀁺􇩄 Division staff are required to choose from numerous finely differentiated reasons
to support their eligibility determinations. As a result, quality control reviews
found errors even when the overall decision to pay or deny benefits was
appropriate. The Division should simplify and reduce the number of reasons
staff must select from in making determinations.
􀁺􇩔 The Division has not established standards in its formal policies and procedures
for supervisor reviews of eligibility determinations. However, managers indicated
that supervisors are expected to review one or two cases per week for each of
their staff, using the same criteria used in DOL quality reviews. To help identify
errors and provide staff training opportunities, the Division should establish
standards and work to ensure supervisors apply review criteria correctly.
Other contributing factors to the high error rates include staff turnover due to
temporary employees leaving to accept permanent positions that provide benefits
and difficulty filling vacancies. Converting some of its temporary positions to
permanent full-time or part-time positions and cross-training employees could also
help the Division address its high error rates.
Division provided inaccurate employer tax information to
IRS (see pages 21 through 24)
Due to long-standing errors in a computer program and the Division’s failure to
validate the data it sends to the Internal Revenue Service (IRS), the Division has
reported inaccurate employer tax information to the IRS and, as a result, has
potentially subjected employers to penalties and assessments. The IRS provides
states with federal employer tax information, including reported taxable wages.
States must match the IRS data to their own information and provide the results to
the IRS. This process is known as the Federal Unemployment Tax Act (FUTA)
certification program. The IRS uses the results to determine if employers are eligible
for credits, or if they must pay assessments and penalties because they underpaid
taxes or did not comply with requirements to report wages to both the state and the
IRS. According to division IT staff, the FUTA certification computer program has
existed since the 1980s and contains hard-to-follow logic that makes needed
changes difficult to analyze.
State of Arizona
page ii
Although the Division attempted to correct the errors during this audit and provided
the IRS with revised tax year 2002 data in July 2004, auditors identified continuing
errors. Specifically, the program failed to report tax payments for some employers.
The Division needs to comply with the IRS requirement to validate the data it reports
to the IRS. It should also conduct a targeted review based on the errors found by this
audit, correct its computer programming, and test its corrections. In addition, the
Division should track information on requests for certifications to help it identify and
correct the sources of errors. Finally, the Division should update and revise its FUTA
certification policies and procedures and ensure that staff follow them.
Division should improve process for determining
employer tax liability (see pages 25 through 30)
Although the Division has taken steps to improve its process for determining
employer tax liability, it can do more to increase timeliness and accuracy. It receives
employer tax application information from the Arizona Department of Revenue
(DOR). Division staff then determine if employers must pay UI taxes and what rate
they must pay. Federal timeliness standards require states to show that at least 60
percent of these determinations were made within 90 days from the last day of the
quarter in which the employer first became liable and that 80 percent were made
within 180 days from the last day of the quarter in which the employer first became
liable. Prior to calendar year 2004, the Division met these standards, but only
because it processed mainly new applications, allowing older applications to build in
an inventory of unprocessed applications. In an effort to improve service to
employers, the Division changed this practice in February 2004 and is now
processing all applications, including 4,500 applications that had accumulated as of
July 2004. The Division did not meet new determination federal timeliness standards
for federal fiscal year 2004 and is currently under a corrective action plan.
Untimely determinations can affect employers by making them ineligible for lower
federal tax rates, as well as claimants who may be initially denied benefits if the
Division has not yet determined their employer’s liability. In an effort to improve
timeliness, the Division is working with DOR to implement an automated system to
more quickly transmit employer applications from DOR to the Division.
The Division has also struggled to meet federal accuracy standards for employer tax
liability determinations in the past and was under a corrective action plan in federal
fiscal year 2004. For calendar year 2003, it reported meeting the federal standard for
the first time since 1998. Arizona’s 2004 corrective action plan submitted to DOL
shows that the Division intended to improve accuracy through filling vacancies,
increasing the frequency of work reviews, and enhancing training. To improve the tax
determination process, the Division should develop a comprehensive policies and
procedures manual, implement a continuous training program, and fill management
and supervisory positions.
Office of the Auditor General
page iii
Division should improve management of employer
refunds and audits (see pages 31 through 35)
The Division should improve its management of two additional employer-related
functions: refunds and audits. First, the Division should improve its process for
issuing refunds to employers who have paid more than they owe in taxes. The
Division maintains a list of pending refunds but needs to correct errors in the list. The
Division’s pending refunds list showed that in June 2004, more than 25,000
employers were eligible to receive over $7 million in refunds ranging from $3 to
$132,538. Many of these refunds had remained unprocessed for over a year.
However, the pending refunds list contains errors, such as one data entry error
totaling $99,000, that require correction. Once it has corrected the errors, the Division
should develop a system to more effectively notify employers of credit balances and
ensure that employers receive accurate refunds in a timely manner.
Second, the Division should continue its efforts to improve its employer audit
practices. DOL requires states to audit employers to ensure that wages and
employees are properly reported. Auditors review payroll records, tax returns, and
bank statements to determine if the employer complied with state UI reporting
requirements. However, the Division has not met DOL’s audit quality standards for
the past 6 years. In addition, the Division did not meet DOL’s quota for audits in 2003.
States must audit at least 2 percent of their contributory employer population each
calendar year. In calendar year 2003, the Division was required to audit 2,141
employers, but the Division audited only 1,810, or 1.7 percent. To help ensure that it
meets federal employer audit standards, the Division hired new staff in February and
May of 2004, conducted audit quality training in June 2004, and is in the process of
implementing an automated system for conducting employer audits.
State of Arizona
page iv
Office of the Auditor General
TABLE OF CONTENTS
continued
page v
1
13
13
15
19
21
21
22
23
24
25
25
28
30
Introduction & Background
Finding 1: Division should improve eligibility
determination accuracy
Federal quality control programs reveal Arizona has high error
rates
Several factors contribute to high error rates
Recommendations
Finding 2: Division provided inaccurate
employer tax information to IRS
IRS requires states to provide employer tax information for FUTA
certifications
Programming errors have resulted in inaccurate reports to IRS
Division should ensure the FUTA certification program is accurate
Recommendations
Finding 3: Division should improve process for
determining employer tax liability
Untimeliness negatively affects employers and compliance with
federal standards
Division has difficulty meeting federal accuracy standards
Recommendations
State of Arizona
TABLE OF CONTENTS
page vi
Finding 4: Division should improve
management of employer refunds and audits
Division should improve its process for administering employer
refunds
Division should continue efforts to more effectively audit employers
Recommendations
Agency Response
Tables:
1 Unemployment Compensation Fund
Schedule of Revenues, Expenses, and Changes in Net Assets—
Enterprise Fund
Years Ended June 30, 2002, 2003, and 2004
(in Thousands—Unaudited)
2 Benefits Eligibility Accuracy Rates
Calendar Years 2000 through 2003
Figures:
1 Summary of Unemployment Insurance Tax Process
As of November 2004
2 Summary of Unemployment Insurance Claims Process
31
31
33
35
8
15
4
5
concluded
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Economic Security’s unemployment insurance program administered
by the Division of Employment and Rehabilitation Services, pursuant to a November
20, 2002, resolution of the Joint Legislative Audit Committee. This is the second in a
series of reports of the Department of Economic Security (Department) and was
conducted as part of the sunset review process prescribed in Arizona Revised
Statutes (A.R.S.) §41-2951 et seq. The first audit reviewed the Department’s welfare
programs (Auditor General Report No. 04-02). The remaining audits will include
reviews of the Department’s information technology and its service integration
initiative, and the Division of Developmental Disabilities’ fiscal intermediaries
program. The final report will be an analysis of the 12 statutory sunset factors.
Federal role in unemployment compensation
The United States Congress created compulsory unemployment insurance (UI)
during the Great Depression in 1935.2 In addition to helping laid-off workers, the
program is intended to stabilize the economy in times of recession. Unemployment
insurance is grounded in federal law but administered through state law by state
officials, and state taxes pay the benefits. The U.S. Department of Labor (DOL) is
responsible for overseeing the UI program to ensure that the states operate it
effectively and efficiently. DOL also provides funding to the states to administer the
program. In addition, DOL is responsible for monitoring state operations and
procedures and providing technical assistance. For example, to obtain annual UI
administrative funding from DOL, states submit an annual request for funding as part
of their State Quality Service Plan.3 DOL reviews each state’s plan and subsequently
determines if any adjustment in funding is required. The regional offices may also
negotiate changes and revisions to the states’ funding requests before the final
1 Information in this section was obtained in significant part from the U.S. House of Representatives Committee on Ways
and Means, 2004 Green Book (2003) and the Government Accountability Office Report to the Chairman, Subcommittee
on Human Resources, Committee on Ways and Means, House of Representatives; Unemployment Insurance: Increased
Focus on Program Integrity Could Reduce Billions in Overpayments.
2 The Social Security Act of 1935 (Public Law 74-271) created the Federal-State Unemployment Compensation Insurance
Program. The Federal Unemployment Tax Act of 1939 (Public Law 76-379) and Titles III, IX, and XII of the Social Security
Act form the system’s framework.
3 The State Quality Service Plan is intended to be a management tool for states to ensure strong performance as well as
a mechanism for determining where resources should be placed.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
1
allocation is approved. In fiscal year 2004, DOL provided about $2.25 billion to states
to administer their programs. DOL also requires states to report the results of
mandatory quality assurance activities. For example, states conduct reviews to
estimate benefit errors, such as overpayments, and report the results to DOL.
Although DOL provides oversight and guidance to ensure that each state operates
its program in a manner that is consistent with federal guidelines, the UI’s federal-state
structure places primary responsibility for administering the program on the
states. The states also have wide latitude to administer their UI programs in a manner
that best suits their needs within the guidelines established by federal law. For
example, states determine weekly benefit amounts and, within parameters
established by federal law, also determine employer tax rate schedules and eligibility
requirements.
To be eligible for UI benefits in Arizona and most states, unemployed workers must
fulfill five general conditions within the overall federal guidelines. They must:
􀁺􇩈 Have worked for a specified amount of time in a job that is covered by the
unemployment insurance program;
􀁺􇩈 Have left their prior jobs involuntarily (such as by employer layoff) or quit their
jobs for good cause, such as lack of transportation or providing care to one’s
child when reasonable attempts to obtain arrangements failed;
􀁺􇩂 Be currently able and available for work, and actively seeking work;
􀁺􇩅 Enroll in employment services or job training programs; and
􀁺􇩂 Be legally eligible to work—for example, noncitizens must be lawfully present
and authorized to work in the United States.
Unemployment insurance in Arizona
The Department’s UI program, administered by the Division of Employment and
Rehabilitation Services’ (Division) Employment Administration, collects
unemployment taxes from employers and provides benefits to eligible unemployed
workers (claimants).
Employer participation—All Arizona employers must either file a joint tax
application with the Arizona Department of Revenue (DOR), which processes income
and sales taxes, or file a UI tax application directly with the Division. DOR forwards
applications to the Division, which determines whether employers are subject to
unemployment taxes and if so, at what rate (see text box, page 3). Some employers,
State of Arizona
page 2
In fiscal year 2004, the
Department of Labor
provided about $2.25
billion to states to
administer their UI
programs.
mainly government entities and nonprofit organizations, may elect not to pay UI
taxes, but they reimburse the unemployment trust fund on a dollar-for-dollar basis for
UI claims paid to their former employees.1 The unemployment trust fund consists of
tax dollars held by DOL in the U.S. Treasury on behalf of the states. Figure 1 (see
page 4) shows the steps employers take to register with the State and then pay their
quarterly taxes. In addition to state taxes, employers subject to UI taxes pay a federal
unemployment tax, called FUTA, which the Internal Revenue Service passes through
to DOL for deposit in the UI trust fund (see text box below).
As of July 2004, Arizona had approximately 121,700 active employers. Another
approximately 26,400 employers, such as some nonprofit employers, were exempt
from participating in the UI program.
Claiming unemployment benefits—Workers who have lost their jobs can file
claims for benefits by telephone, the Internet, or in person at a UI or Job Service
Office, as shown in Figure 2 (see page 5). They must answer questions related to the
reason they are no longer working, their work history, and their availability for work.
After a 1-week waiting period, claimants who meet program requirements (see text
box, page 6) receive a weekly benefit between $60 and $240, depending on their
1 A.R.S. §23-750(B)(4) requires nonprofit employers who elect to make payments in lieu of contributions to pay an amount
equal to the amount of regular benefits and one-half of extended benefits paid, while government employers who make
the same election must pay the total amount of benefits paid, including extended benefits.
Office of the Auditor General
page 3
As of July 2004, Arizona
had approximately
121,700 active
employers.
Arizona State UI tax (SUTA)
Employers are required to pay if they:
􀁺􇩅 Employed at least one employee in any portion of
the week during 20 calendar weeks, or
􀁺􇩐 Paid at least $1,500 in wages during a calendar
quarter.
State tax rates:
􀁺􇩖 Vary according to reserve ratio (employer taxes
paid compared to benefits paid to their employees).
􀁺􇩒 Range from 0.02 percent to a 5.4 percent
maximum.
􀁺􇩁 Are 2 percent for new employers for the first 2
years. (2.7 percent until January 2005)
􀁺􇩁 Are reviewed annually by the Department.
􀁺􇩁 Apply only to the first $7,000 per year for each
employee.
􀁺􇩔 Total $378 per employee at the maximum tax rate.
Exemptions include:
􀁺􇩓 Self-employment, agricultural businesses with less
than 10 employees or less than $20,000 in wages,
student work-study programs, and some work for
family-owned and operated businesses.
Federal UI tax (FUTA)
Employers are required to pay if they:
􀁺􇩅 Employed at least one employee for 20 weeks
in a calendar year; or
􀁺􇩐 Paid at least $1,500 in wages during a calendar
quarter.
Federal tax rates:
􀁺􇩅 Equal 6.2 percent of wages.
􀁺􇩁 Are reduced by 5.4 percent for employers that
pay state unemployment taxes when due (net
tax rate 0.8 percent).
􀁺􇩁 Apply only to the first $7,000 paid annually to
each employee.
􀁺􇩔 Total $56 per employee at the 0.8 percent rate.
Exemptions include:
􀁺􇩁 Agricultural businesses with less than $20,000
in quarterly wages, and nonprofit and
governmental employers.
State of Arizona
page 4
Figure 1: Summary of Unemployment Insurance Tax Process
As of November 2004
Employer begins operating business.
• Employer may submit joint application to the
Department of Revenue (DOR) by mail or
Internet, and DOR provides application
information to Division, or
• Employer may submit UI application directly
to Division.
Division determines if employer
is liable to pay UI taxes. • Has not yet hired employees.
• Has not yet paid enough wages.
• Falls into an exempt category, such as some
nonprofit organizations.
Exemptions may be issued for the following
reasons:
If exempt because employees have not
been hired or enough wages have not
been paid at time of registration:
Division sends notice to
employer requesting update.
If liable:
Employer notified of tax rate:
• New employers: 2.0 percent.1
• Employers who took over an
existing business use that
business' rate.
Employer submits quarterly wage
report and pays required taxes.
Division recalculates tax rate
annually based on taxes paid in
and claims paid out.
Source: Auditor General staff analysis of information from Arizona Revised Statutes and Arizona Department of Economic Security, Division of
Employment and Rehabilitation Services, Unemployment Insurance Tax Administration employer forms, and interviews with management
and staff.
Employer submits registration.
1 Effective January 2005, Laws 2004, Ch. 251, changed A.R.S. §23-729 to establish a 2 percent tax rate for new employers.
Office of the Auditor General
page 5
Figure 2:
Loss of job occurs.
Employer notified
of claim. Employer can protest within 10 days.
After a 1-week waiting period from
date of claim, claimant receives first
check.
Claimant must reapply weekly to
continue benefits. Claimant must also:
• Register with Job Services.
• Actively seek employment.
• Not refuse suitable work.
Benefits end when claimant finds a job
or after 26 weeks.
If claims agent or UI computer system
identifies an issue that could result in
denial of benefits, or employer protests:
Claim sent to Adjudication Unit:
• Claimant interviewed.
• Employer interviewed.
• Documents obtained and
reviewed.
Determination either awarding or
denying benefits is made.
Employer or claimant can appeal:
• Initial hearing with a department
hearing officer.
• Decision can be appealed
to Appeals Board.
• Board decision can be appealed
to Arizona Court of Appeals.
Source: Auditor General staff analysis of information from Arizona Revised Statutes, Arizona Administrative Code, and Arizona Department of
Economic Security, Division of Employment and Rehabilitation Services, Unemployment Insurance Program policies and procedures
manual, unaudited claims data from October 2003 through February 2004, and Web site.
Registration submitted.
If claims agent or UI computer system
does not identify an issue that could
result in denial of benefits, and employer
does not protest:
Claimant answers a series of questions
regarding separation from employment, work
history, and status. Claimant can do this
using the following methods:
• Telephone (66%).
• Internet (30%).
• In person (4%).
Qualifications for unemployment include:
• Earned sufficient wages,
• Fired or laid off for reasons other than
employee's misconduct, or
• Resigned for acceptable cause.
Summary of Unemployment Insurance Claims Process
previous wages.1 Arizona’s minimum weekly benefit amount is
greater than the national average minimum, although only two
states have a lower maximum weekly benefit amount, according to
the Economic Policy Institute. To continue receiving benefits,
claimants must reapply weekly and show that they still meet the
requirements, such as actively seeking employment. Unless
extended in accordance with federal law, the maximum time for
receiving benefits is 26 weeks. The last general extended benefits
program increased the maximum period for receiving benefits to 39
weeks and expired in December 2003.
In state fiscal year 2004, over 195,500 new claims for UI benefits
were filed against 32,219 Arizona employers. The Division
adjudicated over 137,500 claims, resulting in the denial of over
71,500 claims. Claims may be denied for various reasons, including
reasons discovered through employer protests. Employers are
notified when a claim is filed, and they can file a protest within 10
days if, for example, they believe that the employee quit without
good cause or was fired for a legitimate reason. When the Division
receives a protest, it conducts an investigation in order to determine
whether the claimant is eligible for benefits. Other reasons for denial
include that the claimant has not earned sufficient wages to qualify
for benefits or has failed to conduct an adequate search for work.
The Division requires claimants to provide personal identifying
information, including name, aliases, birth date, address, telephone
number, social security number, and citizenship status. If not a U.S.
citizen, the claimant must provide his or her alien registration
number. In compliance with federal law, the Division verifies with the
U.S. Department of Homeland Security that an alien claimant is in satisfactory
immigration status. Undocumented workers in the United States are ineligible for
unemployment benefits.
Organization and staffing
Arizona’s unemployment program is administered by the Division of Employment
and Rehabilitation Services’ (Division) Employment Administration. The Division is
also responsible for other programs, including the Department’s Jobs Service
program, which refers potentially qualified applicants to employers filling vacancies
using employer-provided job requirements and provides assistance to job seekers
looking for suitable employment. The Division has two sections for administering the
UI program:
1 Laws 2004, Ch. 251 revised Arizona Revised Statutes, including §§23-771 and 23-779. Among the statutory changes
were increases in the minimum quarterly wages for benefits from $1,000 to $1,500, the minimum weekly benefit amount
from $40 to $60, and the maximum weekly benefit amount from $205 to $240.
State of Arizona
page 6
Arizona claimant eligibility requirements
include:
Wages:
􀁺􇩅 Earned at least $1,500 in one base period quarter
(base period = first four of the last five completed
quarters prior to becoming unemployed), and
􀁺􇩅 Earned at least half his or her highest base period
quarterly wages in a second base period
quarter; or
􀁺􇩅 Earned sufficient wages in one base period quarter
to qualify for the maximum weekly benefit amount
(currently $5,987.50 to qualify for $240), and
􀁺􇩅 Earned wages in a second base period quarter,
and
􀁺􇩅 Earned total wages in the base period equal to or
greater than the taxable limit (currently $7,000).
Separation:
􀁺􇩕 Unemployed through no fault of their own.
Other:
􀁺􇩒 Register with Job Services Office unless exempt for
reasons such as being unemployed because of a
labor dispute.
􀁺􇩁 Actively seek employment.
􀁺􇩕 UI call centers (313 FTEs) operates call centers in Phoenix and Tucson, and an
adjudication center in Yuma. The call centers are responsible for the intake and
processing of new and continuing UI claims filed by phone, the Internet, or
paper application forms. Each call center has an adjudication unit that is
responsible for resolving eligibility questions and processing formal appeals
from claimants and employers. The Yuma center takes in-person claims.
Together with local offices in San Luis and Somerton, the center serves the large
seasonal migrant farm worker population in Yuma County. According to division
officials, many of these seasonal workers prefer filing claims in person or do not
have access to a telephone or the Internet.
􀁺􇩅 Employer tax administration (199 FTEs) is composed of seven primary units that
are responsible for employer tax determinations, collections, and appeals:
􀂄􈑅 Employer status—Processes employer tax applications and determines
whether they are required to participate in the UI program. According to
internal reports, in calendar year 2003, the Status Unit made approximately
17,300 employer tax liability determinations;
􀂄􈑅 Experience rating—Annually computes employer tax rates and resolves
monetary issues on benefit claims. In calendar year 2003, the unit issued
approximately 111,000 rate notices to employers;
􀂄􈑆 Field audit—Audits a sample of employers through on-site visits, reviews of
employer records, and interviews to determine employer compliance with
requirements;
􀂄􈑁 Appeals—Reviews determinations for employers seeking reconsideration
of their status or rating;
􀂄􈑁 Accounting—Receives tax payments, deposits monies collected, and
records employer transactions;
􀂄􈑃 Collections—Collects delinquent tax payments from employers; and
􀂄􈑓 Scan—Images incoming employer documents.
The Tax Administration is also responsible for conducting the annual Federal
Unemployment Tax Act (FUTA) certification as required by the Internal Revenue
Service (IRS). States are required to cross-match IRS employer UI tax information to
their state employer tax information and provide the results to the IRS. The IRS uses
this information to determine if employers complied with federal UI tax requirements.
Office of the Auditor General
page 7
In addition to the main UI program, the Division also administers several programs
that assist special categories of unemployed people. These programs, with 54 FTEs,
include unemployment compensation for federal employees and ex-military
personnel, combined wage claims for claimants who earned wages in more than one
state, approved training for individuals with minimal marketable job skills, shared
work, Trade Readjustment Allowance for workers who lost their jobs due to imports,
and Disaster Unemployment Assistance for workers and self-employed individuals
who lost their jobs as a result of a disaster.
Funding
Funding for the UI program comes primarily from taxes paid by employers. The
program does not receive any State General Fund monies. State unemployment
taxes pay for UI benefits. As shown in Table 1, Arizona received approximately $194.9
State of Arizona
page 8
Table 1: Unemployment Compensation Fund 1
Schedule of Revenues, Expenses, and Changes in Net Assets—Enterprise Fund
Years Ended June 30, 2002, 2003, and 2004
(in Thousands—Unaudited)
2002 2003 2004
Operating revenues:
Employer tax contributions $ 162,157 $ 160,963 $194,894
Governmental grants and contracts:
Reed Act 144,080
Other2 40,404 78,823 59,408
Interest and penalties 1,490 1,598 1,637
Other 23 22 26
Total operating revenue 348,154 241,406 255,965
Operating expenses:
Benefits paid 406,406 455,685 397,657
Operating loss (58,252) (214,279) (141,692)
Nonoperating revenues:
Investment income 63,643 57,395 45,994
Income (Loss) before transfers 5,391 (156,884) (95,698)
Transfers out (1,506) (5,189) (1,654)
Increase (Decrease) in net assets 3,885 (162,073) (97,352)
Net assets, beginning of year 1,051,658 1,055,543 893,470
Net assets, end of year $1,055,543 $ 893,470 $796,118
1 Excludes the costs of administering the program, which is financed by the U.S. Department of Labor, Unemployment
Insurance Program. In fiscal years 2002, 2003, and 2004 the Department expended $36 million, $32 million, and $33
million, respectively, to administer the program.
2 Includes monies received from the U.S. Department of Labor for extended benefits.
Source: Auditor General staff analysis of the State of Arizona Comprehensive Annual Financial Report for the years
ended June 30, 2002 and 2003; and financial schedules prepared by the Department of Economic Security for
the year ended June 30, 2004.
million in state employer taxes in state fiscal year
2004, and paid out about $397.6 million in benefits.
DOL holds the state and federal UI tax monies in
trust on behalf of the states in the Unemployment
Trust Fund of the U.S. Treasury.
FUTA taxes pay for program administration. Each
year, DOL allocates the congressional appropriation
among the states based on projected workloads
and other considerations (see text box). Arizona has
been allocated approximately $26 million in fiscal
year 2005 to administer the UI program. In addition
to these regular annual appropriations, Congress
sometimes distributes additional monies to the states when the federal fund balance
reaches specified levels. These additional monies are called Reed Act distributions.
In 2002, Congress distributed $8 billion in Reed Act monies, of which Arizona
received $144 million. The 2002 distribution can be spent on UI program
administration or benefits, but must be appropriated by the state legislature if used
for administration. The Legislature has not yet appropriated these monies, so they are
part of the net assets shown in Table 1 (see page 8). Finally, federal unemployment
taxes also pay for a federal account for state loans and for half of the Federal-State
Extended Benefits Program. This program provides benefits to unemployed workers
whose state benefits have expired, generally for an additional 13 weeks, during times
of high unemployment.
Arizona’s Unemployment Compensation Fund net assets as of June 30, 2004, were
about $797 million. According to a 2002 report by the Center on Budget and Policy
Priorities, Arizona’s fund could support over 1.5 years of UI benefits. Fund solvency
is important for two reasons. First, states with insolvent funds must borrow money
from the federal government and repay the loan with interest. Second, solvency of the
UI fund from which benefits are paid affects state employer tax rate schedules. The
fund is kept at levels that ensure that there will always be enough money to pay
eligible unemployed workers, even during times of high unemployment. Department
officials report that state law is designed to self-correct fund balances that may be too
high or too low. A higher fund balance reduces employer tax rates. Conversely, lower
balances will trigger higher employer tax rates. According to department officials, the
fund is designed to gradually raise rates as the economy recovers rather than
increasing rates during a recession.
Scope and methodology
This audit focused on the Division’s main UI program and includes the following four
findings and associated recommendations:
The federal government
distributes federal
unemployment taxes to
states for administering
the UI program.
Office of the Auditor General
page 9
UI Administration Funding
􀁺􇩒 Regardless of unemployment levels, all states receive
funds based on projected workloads, overhead
allocation, and staff requirements.
􀁺􇩓 States receive additional contingency funds based on
workload levels that exceed projected levels.
􀁺􇩉 In federal fiscal year 2002, 53 percent of FUTA taxes
went to states for administration purposes.
􀁺􇩔 To increase the accuracy of eligibility determinations, the Division should
consider cross-training staff, converting temporary part-time positions to
permanent full-time or part-time employees, and making use of existing quality
control review data to determine and correct the causes of errors.
􀁺􇩔 To ensure accuracy of employer data reported to the IRS, the Division should
conduct an annual quality review of its FUTA certification computer program,
develop a tracking system related to employer FUTA recertification requests,
and update and revise its FUTA certification policies and procedures.
􀁺􇩔 To improve the Division’s process for determining employers’ tax liability, the
Division should establish a policy to fully document its reasons for removing
cases from the Tax Performance System’s (TPS) list of failed cases, continue its
efforts to implement an automated application transmittal system, provide
ongoing training to ensure that staff are following procedures, and continue its
efforts to adequately staff tax determination management and supervisory
positions.
􀁺􇩔 To improve the employer refund and audit processes, the Division should
conduct a comprehensive analysis of and correct errors in its pending refunds
list, develop a system to notify employers of credit balances, provide ongoing
training to refund staff and continue its efforts to provide ongoing auditor
training, fill vacant positions, and implement an automated audit system.
Auditors used a variety of methods to study the issues addressed in the audit. Audit
methods included interviews with division management and staff, and Employee
Services and Support staff; and review of applicable state and federal statutes and
regulations, and department policies and procedures. To perform more specific audit
steps, auditors used the following methods:
􀁺􇩔 To determine how the Division can improve the accuracy of unemployment
eligibility determinations, auditors reviewed federal quality reports between
calendar year 1999 and June 2004; reviewed Arizona’s 2004 and 2005
corrective action plans, training manuals, internal management reports, and the
benefits system user guide; and observed functions related to the UI claims
process at the Tucson and Phoenix unemployment call centers.
􀁺􇩔 To assess the adequacy of the Division’s FUTA certification computer program,
auditors reviewed IRS requirements and regulations, analyzed the Division’s
FUTA match database for tax year 2002, and interviewed IRS officials. Auditors
also reviewed employer records and internal memoranda and other
documentation related to errors in the FUTA match program.
State of Arizona
page 10
􀁺􇩔 To evaluate the Division’s process for new employer tax determinations, auditors
reviewed DOL unemployment insurance quality reports from calendar years
1998 to 2002, reviewed performance standards, and required corrective action
plans for Arizona from federal fiscal years 2002 to 2005. Auditors observed the
tax determination process and reviewed employer tax determination
documents, the results of quality reviews, and internal reports tracking the
Division’s inventory of unprocessed tax determination documents from January
through July 2004.
􀁺􇩔 To assess the adequacy of the Division’s employer refund and audit processes,
auditors reviewed DOL unemployment insurance quality reports from calendar
years 1998 to 2003, performance standards, and required continuous
improvement plans for Arizona from federal fiscal years 2002 to 2004. Auditors
observed an employer audit and analyzed the Division’s employer refunds list
as of June 2004. Additionally, auditors reviewed internal field audit management
reports and system requirements for the Division’s proposed automated
employer audit system, and contacted representatives from several states to
identify ways to improve the quality of employer audits.1
􀁺􇩔 To develop the Introduction and Background section, auditors compiled
unaudited information from state and federal laws and regulations, department
annual reports for fiscal years 2001 through 2003, department and DOL Web
sites, federal reports including a July 2002 U.S. Government Accountability
Office (GAO) report and the 2004 Green Book prepared by the U.S. House of
Representatives Committee on Ways and Means, division training and
operating manuals, information provided by the Department from its Financial
Management Control System, and other information provided by the
Department.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director and staff of the
Department of Economic Security for their cooperation and assistance throughout
the audit.
1 Auditors contacted representatives from Connecticut, Idaho, Utah, Washington, and Wisconsin because these states had
consistently passed DOL’s performance measures for field audits from calendar years 2000 to 2003.
Office of the Auditor General
page 11
State of Arizona
page 12
Division should improve eligibility determination
accuracy
The Division needs to improve the accuracy of how it determines eligibility for UI
benefits. The Division measures its accuracy through two federally mandated quality
control programs, both of which reveal that Arizona ranks far below the national
average. Several factors, such as the failure to use all available quality control data,
complexity of determination statements, limited supervisory reviews, and lack of
cross-training, contribute to incorrect determinations, which can result in erroneous
payments or improper denial of benefits. The Division should use quality control data
to identify causes of errors and methods to reduce them, consider rotating call center
employees through its units, and increase training for supervisors and staff.
Federal quality control programs reveal Arizona has high
error rates
Arizona’s eligibility determination accuracy is significantly below DOL standards and
national averages. High error rates, which are measured by two different accuracy
reviews, adversely affect both employers and claimants.
High error rates found in two reviews—DOL requires a quarterly accuracy
review that focuses on the eligibility determination process and an annual review that
estimates overpayment error. Both reviews found high error rates in 2003:
􀁺􇩐 Process errors high—In calendar year 2003, the Division’s Benefits Timeliness
and Quality Review (BTQ) found only a 43.1 percent pass rate for the eligibility
determination process (see text box, top of page 14). By comparison, the DOL
standard is 75 percent, and the national average was 71 percent. These process
Office of the Auditor General
FINDING 1
page 13
Arizona’s accuracy rate
was 43.1 percent in
2003, compared to
DOL’s standard of 75
percent.
errors do not always represent incorrect determinations, but may indicate that
the Division made the right determination while citing the wrong reason. The
Division has been under a multi-year corrective action plan for 4 years and
reported to DOL that it plans to meet the federal quality standard by September
30, 2006.
􀁺􇩏 Overpayments high—The Division's Benefit Accuracy Measurement (BAM)
program estimates the accuracy of the benefit amounts determined (or denied)
for paid and denied claims (see text box below). BAM reviews show Arizona's UI
overpayment rates have increased each year from 10 percent of benefit dollars
paid in 1999 to nearly 22 percent in 2003. Although DOL has not established
State of Arizona
page 14
Benefits Timeliness and Quality Review (BTQ)
DOL requires Arizona and other large states to review 100 cases per quarter, including 50
determinations about separation issues (such as whether the employee was fired or quit) and 50
determinations about other issues (such as whether the employee was able to and available for
work). This accuracy review assesses:
􀁺􇩔 The fact-finding adequacy.
􀁺􇩗 Whether the state applied law and policy correctly.
􀁺􇩔 The adequacy and appropriateness of the written determination.
Division staff review the sample cases using six scoring criteria. DOL regional office staff and
representatives of other states’ UI programs also review the cases each quarter to ensure that
states are applying the criteria consistently. If fewer than 75 percent of the reviewed cases meet
federal standards, DOL requires the state to submit a corrective action plan outlining how it plans
to meet standards. Persistent performance below the criterion could result in the state’s loss of
federal administrative funds.
Benefit Accuracy Measurement Program (BAM)
DOL requires states to examine a randomly selected sample of paid claims and unpaid claims
each year, selecting several cases from each week throughout the year. In 2004, sample sizes
were 480 paid and 450 denied claims. The program is intended to identify system-wide problems
so future errors can be prevented. In addition, the program provides an estimate of the total
overpayment of benefits.
Division investigators review eligibility and payment issues of selected cases during a single week
to determine whether determinations were made in conformity with state law and policy. For
claims that were overpaid or underpaid, staff calculate the payment that should have been made.
DOL has not established performance standards for BAM results, but publishes state and national
results.
BAM performance standards, it publishes state and national results for
comparison. In calendar year 2003, Arizona's overpayment error rate was 21.9
percent, third highest in the United States. Table 2 shows the Division's accuracy
compared to the national average over the past 4 years.
High error rates can adversely affect
claimants and employers—High error
rates place an undue burden on
claimants. For example, erroneous
payments can lead to overpayments that
claimants are responsible for paying back.
A claimant receiving the average benefit
amount ($173) who is paid benefits for 6
weeks and is subsequently found to be
ineligible for those benefits would have to
repay over $1,000. For claimants who are
out of work or have limited income, such
overpayment recovery can create financial
hardship. Similarly, financial hardship may
result from denying benefits to eligible
claimants.
Erroneous payments can also adversely affect an employer’s tax rate. Employers’
state unemployment tax rates are determined, in part, based on the amount of
benefits paid on claims filed by the employer’s former employees (see text box, page
4). The effect is even greater on employers who do not pay unemployment taxes, but
pay dollar-for-dollar on any paid claim. These “reimbursement” employers, mainly
government entities and nonprofit organizations, are credited for improper payments
only when the claimant repays the overpayment.
Several factors contribute to high error rates
Several key factors contribute to high error rates. Auditors found that the Division
does not use some available information about errors, has an overly complex list of
determination reasons, and conducts only limited supervisory reviews. Changes
such as rotating staff and improving training could improve eligibility determination
and benefit payment accuracy.
Available information was not used—Although BTQ results are shared with the
division staff (called adjudicators) who determine claimants’ eligibility for UI benefits,
the BAM review results are not used for training purposes. According to the BAM
State Operations Handbook, a primary purpose of BAM is to identify system-wide
problems that could lead to correcting or reducing errors. A September 2003 DOL
Office of the Auditor General
page 15
In 2003, Arizona’s
overpayment error rate
was 21.9 percent, third
highest in the United
States.
Table 2: Benefits Eligibility Accuracy Rates
Calendar Years 2000 through 2003
Percentage meeting accuracy standard
in quality review
2000
2001
2002
2003
Cases:
Arizona 51.2% 48.1% 37.7% 43.1%
National average 70.1 71.0 70.5 71.2%
Department of Labor standard 75.0 75.0 75.0 75.0
Benefit Payments
Arizona 87.6% 86.7% 83.1% 78.1%
National average 91.5 91.8 90.9 90.7
Source: Auditor General staff analysis of data from U.S. Department of Labor’s UI PERFORMS annual
reports—calendar years 2000 through 2002, UI Benefit Accuracy Measurement annual report
for calendar year 2003, and the Arizona Department of Economic Security.
State of Arizona
page 16
Inspector General report found that BAM reviews nation-wide had an exceptionally high
accuracy rate (over 99 percent). Further, BAM reviews yield detailed data such as error
types, their causes, and who was responsible for the errors—the claimants, the
employers, or the Division.
Although Arizona’s overpayment error rate rose by 120 percent between 1999 and
2003, the Division has not regularly analyzed the data to determine why overpayments
occur and what can be done to reduce them. Division management acknowledged
they should use BAM results to identify errors and trends. In response to this audit’s
recommendations, the Division created a monthly review and analysis report for BAM
data and reviewed common error trends from October 7 through November 5, 2004.
The Division should use BAM information to train adjudicators and reinforce the
application of policies and procedures that have been misapplied or misinterpreted.
Statements supporting determinations are complex—The Department
developed a manual of statements that adjudicators use to identify the reasons for its
determinations. Choosing the incorrect legal justification for the determination can
result in the case failing a BTQ review, even if the decision to deny or award benefits is
correct. However, there are numerous fine differences between some statements from
which adjudicators must choose. For example, the manual provides over 80 reasons
for voluntarily leaving and over 90 reasons for discharge. In one case, division staff
appropriately denied benefits to a claimant whose vehicle had broken down and who
had no alternate transportation, but chose a slightly different reason from the one
determined to be correct in the BTQ review. As a result, the BTQ review deducted points
for citing the wrong reason (see text box, below). Some supervisors noted that
adjudicators have difficulty making fine differentiations. According to division staff,
some states have simplified statements and instead require staff to write a more
detailed explanation of the facts in the case. For example, according to a Wisconsin
Fine differences in reasoning can affect the BTQ review score
A claimant was denied benefits because his vehicle broke down and he did not have alternative
transportation.
The adjudicator cited the following reason:
“During the period shown, you lost your usual means of transportation and had no access to or were not
willing to use public transportation during the hours the majority of work in your occupation is performed.
You were not considered available for work.”
The BTQ review determined that the correct statement was:
“You have lost your usual means of transportation and there is no public transportation available during the
hours that the majority of work in your occupation is performed. You cannot be considered available for
work.”
Although the decision to deny benefits was correct, the BTQ review deducted points for citing the wrong
reason.
Arizona’s overpayment
error rate rose by 120
percent between 1999
and 2003.
Office of the Auditor General
page 17
official, Wisconsin has fewer than 100 statements for voluntarily leaving and
discharge combined. Although the official explained that the number of statements
needed depends on the state’s laws, division managers believe they may be able to
simplify and reduce the number of statements used in Arizona, and training staff have
already begun to review the statements. The Division should simplify and reduce the
number of reasons that adjudicators must select from in making determinations.
Supervisory reviews are limited—Although division managers stated that
supervisors are expected to review one or two cases per week for each adjudicator,
the Division has not established a written policy for supervisor reviews. Supervisors
report that they have only limited time to complete supervisory reviews and mentor
claims agents and adjudicators. However, supervisory case reviews could help
identify and correct errors and provide training opportunities to staff. In response to
this audit’s recommendations, the Division issued a memo to supervisors in
December 2004, instructing them to review four cases per month per adjudicator.
The Division should establish supervisory review standards in its formal policies and
procedures. If meeting a standard based on reviewing all adjudicators’ work would
be impossible, the Division should require supervisors to target reviews based on the
adjudicators’ experience and past accuracy rates or the issue involved in the case.
The Division’s training staff has recently begun reviewing the supervisors’ reviews to
help ensure uniform application of criteria. Training staff say supervisory reviews
should be conducted using the same criteria and forms used during the BTQ review.
However, supervisors have received limited BTQ training. As a result, one manager
expressed concern that supervisors may not know the criteria well enough to train the
deputies they supervise. Follow-up training and the newly implemented reviews
could help to ensure that supervisor reviews are effective. In response to this audit’s
recommendations, division management reported that staff received refresher
training in November and December 2004.
Division does not cross-train employees—The Division should consider cross-training
adjudicators and claims agents and rotating them through the different call
center positions to help reduce errors. Although division managers reported that one
call center has provided some limited cross-training to claims agents and
adjudicators, another call center has not followed that model because its
management considers the functions significantly different. By cross-training and
rotating staff, managers would have more flexibility to adjust to workload demands
and absences due to vacations, illnesses, and other reasons. Rotating staff also
provides workers with variety in their work, and may improve the quality of the
Division’s determinations. Division management reported they have begun to
develop a curriculum for cross-training employees and plan to begin rotating cross-trained
staff by April 2005.
Hiring practices contribute to high error rates—The Division uses a combination
of permanent and temporary workers in its call centers because its workload
fluctuates with the unemployment rate. Because temporary positions do not provide
Cross-training and
rotating staff would
allow more flexibility to
adjust to workload
demands.
medical insurance and other benefits, division management reports that employees
leave for other positions that do provide benefits. In addition, the Division has chosen
to hire adjudicators only from the pool of claims agents, which limits its ability to
replace or add adjudicators. Both practices may contribute to high error rates by
adding to employees’ workload when positions are unfilled. In contrast, Wisconsin
offers permanent part-time positions that provide benefits to help retain employees
and hires adjudicators from outside the UI agency. The Division should consider
turning some of its current, temporary part-time positions into permanent full-time or
part-time positions that would qualify for employee benefits and hiring qualified
outsiders for adjudicator positions.
Underestimated workload projections may have affected performance—
One division manager reported that unforeseen workload increases may have
contributed to an increase in errors between 2001 and 2002. According to an internal
report, the number of UI claims in the fourth quarter of calendar year 2001 was over
70 percent higher than in the last quarter of calendar year 2000, while the number of
initial claims filed in calendar year 2001 totaled over 60 percent more than those filed
in 2000. In March 2001, the nation entered an economic recession for the first time
since 1991. Arizona’s unemployment rate rose from 3.6 percent in January 2001 to
6.1 percent in January 2002.
These workload increases occurred just after the Division changed its method of
service delivery. In 2001, the Division completed its conversion from providing
unemployment services in local offices throughout the State to having two regional
call centers in Phoenix and Tucson, as well as an adjudication center in Yuma.
Further, although the call centers were staffed at projected levels, the Division did not
anticipate the increased workload when it projected call center staffing needs during
call center planning in 2000.
The Division did not
anticipate the increased
workload when it
projected call center
staffing needs in 2000.
State of Arizona
page 18
Recommendations
1. The Division should regularly analyze data from the BAM program to determine
the causes of errors and use the results to train staff in an effort to reduce errors.
2. The Division should simplify and reduce the number of reasons adjudicators
must select from in making determinations.
3. The Division should establish supervisory review standards in its formal policies
and procedures.
4. The Division should continue its efforts to provide additional training for
supervisors on the Benefits Timeliness and Quality standards to ensure that they
apply them correctly during supervisory reviews.
5. The Division should consider cross-training adjudicators and claims agents and
rotating them through the adjudications and initial claims units in the call centers.
6. The Division should consider turning some of its current, temporary part-time
positions into permanent full-time or part-time positions that would qualify for
employee benefits and hiring qualified individuals from outside the UI program
as adjudicators.
Office of the Auditor General
page 19
State of Arizona
page 20
Division provided inaccurate employer tax
information to IRS
Due to long-standing errors in its FUTA certification computer program, the Division
has provided inaccurate employer tax information to the IRS and potentially
subjected employers to penalties and assessments. Federal law requires states to
provide employer tax and wage information to the IRS to confirm that employers are
eligible to receive a federal tax credit. However, errors in the Division’s FUTA
certification computer program that have existed since at least 1995 resulted in
inaccurate reporting for hundreds of employers. Although the Division attempted to
correct the errors during the audit, auditors discovered that the program continues to
report inaccurate information. The Division should develop a quality control program
to improve accuracy, track employer requests for accurate tax information, and
update and follow its FUTA certification policies and procedures.
IRS requires states to provide employer tax information
for FUTA certifications
Each year, the IRS provides states with federal employer tax information, including
federal account numbers and reported taxable wages. States are required to cross-match
the IRS data to their state employer tax information and provide the results to
the IRS. The IRS then determines if employers complied with federal unemployment
insurance tax requirements and are eligible to receive the FUTA tax credit. If there is
a discrepancy between the state’s and IRS’ information, the employer could be
subject to additional FUTA taxes. In addition, the IRS uses the cross-match results to
determine if employers are eligible for tax refunds, or if they need to pay assessments
and penalties. This process is known as the FUTA certification program.
Office of the Auditor General
page 21
States provide the IRS
with employer tax data.
FINDING 2
Programming errors have resulted in inaccurate reports
to IRS
Despite the importance of reporting accurate information to the IRS, the Division has
reported inaccurate tax information for hundreds of employers. Consequently,
employers potentially faced unnecessary penalties and assessments from the IRS.
The problem results from significant, long-standing errors in the computer program
that produces the report. During the audit, the Division attempted to correct some of
the program’s errors and provide accurate information to the IRS, but auditors found
that the program continued to inaccurately report employer tax information.
Inaccurate data reported to IRS, subjecting employers to potential
penalties—The Division reported inaccurate tax rates, tax payments, and
employer account numbers to the IRS. For example, for data submitted to the IRS for
tax year 2002, the Division incorrectly reported tax rates for over 800 employers who
had not yet received a tax liability determination and tax rate, were determined to be
exempt from paying taxes, or were no longer active. When such discrepancies occur,
the IRS notifies employers. The notice instructs the employer to contact the
appropriate state agency to resolve the discrepancy. If the employer does not
respond to the IRS within 90 days, the IRS may charge the employer penalties and
interest. Although the Division does not track requests for corrected FUTA
certifications, auditors reviewed documentation indicating that employers faced
potential penalties imposed by the IRS due to errors in the Division’s FUTA
certification computer program. For example, a representative for one employer
wrote to the Division in April 2004 after receiving a notice from the IRS because the
Division had reported an incorrect account number and taxable wages for tax year
2001. For tax year 2002, the Division again reported an incorrect account number
and failed to report the employer’s tax payment to the IRS.
Programming errors caused inaccurate reporting—During the audit, the
Division’s IT staff reviewed the computer program that generates the data and
confirmed that it contained errors that resulted in showing incorrect tax rates, tax
payments, and employer account numbers in data submitted to the IRS. For
example, the program incorrectly assigned tax rates to exempt employers. The errors
appear to be long-standing. According to the Division’s IT staff, the FUTA certification
program has existed since the 1980s and contains hard-to-follow logic that makes
needed changes difficult to analyze. Additionally, in 1995, a division IT analyst stated
in an internal memo that the program was outdated and recommended a full rewrite.
The Division notified the IRS of the problem and attempted to correct the
programming errors during the audit. In July 2004, the Division provided the IRS with
revised data for the 2002 tax year. However, auditors’ review of the revised data
identified continuing errors in reported employer tax payments. For example, auditors
reviewed seven cases in which the corrected FUTA certification computer program
failed to report the employers’ tax payments, including one payment of $6,602.
State of Arizona
page 22
The Division provided
incorrect employer tax
data to the IRS.
Division should ensure the FUTA certification program is
accurate
The Division should take steps to ensure that it reports accurate employer tax
information to the IRS. Specifically, the Division should address the following:
􀁺􇩄 Division should comply with IRS requirements for quality review of FUTA
reporting—The IRS requires states to conduct an annual review of the quality of
their FUTA certification computer programs. The purpose of the review is to
identify problems and minimize employer requests for additional certifications.
According to division management, the Division followed IRS requirements to
validate part of the replacement data that it sent to the IRS in July 2004. This was
the first time in at least 10 years that the Division had validated the program as
required by the IRS. The Division should comply with this requirement in order
to detect and correct errors. However, because these validation efforts did not
discover some errors in the replacement data, the Division should also conduct
a targeted review of its computer program and data that the program generates
based on the specific errors discovered during this audit. The Division should
document the results of these reviews and take appropriate steps to correct any
errors found in its reviews. Further, the Division should carefully test any program
changes made to correct these errors.
􀁺􇩅 Employer requests for corrections should be tracked and researched—Even
though its policies and procedures require it to do so, the Division does not
adequately track information on requests for recertifications in response to IRS
discrepancy notices. Tracking information on these requests would allow the
Division to identify common errors and allow division staff to determine if the
FUTA certification program is accurately reporting employer tax information to
the IRS. The Division could then use the information to identify and correct
potential programming errors. At a minimum, the Division should track the
employer’s state account number, federal identification number, and the reason
for the FUTA recertification request.
􀁺􇩄 Division should update and revise its FUTA certification policies and
procedures—The Division’s policies and procedures for FUTA certifications
were established in 1997 and do not identify specific staff positions or units that
are responsible for conducting the required annual quality review and preparing
the required report to transmit the FUTA certification information to the IRS.
Therefore, the Division should update and revise its FUTA certification policies
and procedures and ensure that staff follow them.
Office of the Auditor General
page 23
Recommendations
1. The Division should implement a quality control program to improve the
accuracy of data it submits to the IRS by:
a. Following IRS requirements to conduct an annual quality review of its FUTA
certification computer program;
b. Conducting a targeted review related to errors discovered during the audit;
c. Documenting the results of its reviews;
d. Correcting errors discovered in its reviews; and
e. Carefully testing any program changes made to correct these errors.
2. The Division should develop a system to track information related to FUTA
recertification requests, including the employer’s state account number, federal
identification number, and the reason for the FUTA recertification. The Division
should use this information to determine if any programming errors exist and
then correct them.
3. The Division should update and revise its FUTA certification policies and
procedures and ensure that staff follow them.
State of Arizona
page 24
Division should improve process for determining
employer tax liability
The Division can improve both the timeliness and accuracy of determining which
employers need to pay UI taxes. Late or inaccurate determinations can affect
employers’ contribution levels, hinder claimants’ ability to receive benefits, and lower
the State’s tax revenues. The Division is trying to address timeliness and accuracy
problems. For example, it has attempted to improve the timeliness of processing
applications by developing an automated system to transmit employer applications.
Auditors identified additional steps that could help, including a policy and procedures
manual, refresher training, and continuing efforts to fill management and supervisory
positions.
Untimeliness negatively affects employers and
compliance with federal standards
Although the Division generally has been able to meet overall federal standards for
timeliness of employer tax liability determinations, it has done so by focusing mainly
on processing new applications. In doing so, the Division has allowed a substantial
backlog of older applications to develop—a situation that causes problems for
employers, claimants, and the State.
Division concentrated on processing newest applications—The Division is
responsible for determining whether an employer is required to pay UI taxes (see text
box, page 3, for more information on which employers must pay). DOL has
established standards for how quickly these determinations should be made. It
requires states to show that at least 60 percent were made within 90 days from the
last day of the quarter in which the employer first became liable and that 80 percent
were made within 180 days from the quarter in which the employer first became
liable. The Division has met these standards in recent years, but it has done so
Office of the Auditor General
page 25
DOL has established tax
determination timeliness
standards.
FINDING 3
mainly by trying to process new applications, leaving many older applications in an
unprocessed inventory. Internal reports show that as of July 2004, the Division had
an inventory of over 17,000 unprocessed employer documents, including
approximately 4,500 employer tax applications. Some of the unprocessed tax
applications had been submitted as early as February 2003.
Recent policy change addresses backlog of old applications, but overall
timeliness has decreased—In February 2004, division management decided to
allow staff to process all employer tax applications, including those that had
accumulated in the unprocessed inventory. While division officials believe this
change will improve service to employers, they also expect the change to decrease
timeliness overall because staff will not be able to concentrate as heavily on
processing new applications. In fact, the Division did not meet new determination
federal timeliness standards for federal fiscal year 2004 and is currently under a
corrective action plan. The Division’s corrective action plan submitted to DOL
indicates that the 90-day new determination timeliness rate for the quarter ending in
December 2004 is expected to be 40 percent.
Untimely determinations have several negative effects—Timely tax
determinations are important for employers and claimants, and they also affect state
revenue.
􀁺􇩅 Effect on employers—For an employer, a delayed determination can mean
having to pay a much higher FUTA tax. To qualify for the reduced FUTA tax
credits, an employer must comply with state UI requirements, including paying
the required taxes on time (see text box, page 3). Some employers submit tax
payments prior to receiving a determination, and the Division establishes a
“suspense” account to record the payment until a determination is made and a
regular account is established. However, the Division does not report these
payments to the IRS. As a result, the IRS does not know that the employer is
complying with state UI requirements–and thus eligible for a lower FUTA
rate–until the Division transfers the payments to the employer’s account once a
tax determination is made. According to an auditor analysis of unaudited
division data provided in June 2004, there were more than 3,800 suspense
accounts with a total balance of over $2 million. In one case, an employer had
a tax payment suspense account totaling over $50,000, but had not yet received
a determination.
Additionally, untimely determinations can lead to potentially assessing penalties
against employers, and create an unnecessary burden on employers. Arizona
statute establishes a penalty from $35 to $200 against employers who fail to
submit their wage reports on time. Arizona statute also allows the Division to
charge interest of 1 percent per month on late tax payments.
􀁺􇩅 Effect on claimants—Untimely tax determinations could also hinder claimants’
ability to receive UI benefits. DOL’s reasons for establishing the timeliness
State of Arizona
page 26
standards included ensuring that states obtain important employer wage
records needed for UI benefit payments. Claimants may be initially determined
ineligible to receive benefits if the state has not yet determined their employers’
tax liability and processed the employers’ wage reports. Auditors reviewed
several cases in which claimants had applied for unemployment insurance
benefits, but had initially been determined ineligible because the Division had
not processed their employers’ applications and wage reports. The claimants in
these cases had to file wage protests, which prompted the Division to process
the employers’ applications and allowed the claimants to receive their benefits.
􀁺􇩅 Effect on state revenues—Untimely determinations could result in a loss of tax
revenue for the State. DOL’s timeliness standards are also intended to ensure
that states avoid delays that can result in a loss of tax revenue. When employers
wait to receive a determination before beginning to pay UI taxes and
determinations are delayed, the State loses the use of those tax revenues during
the delay. Because state UI tax collections earn interest as part of the state UI
trust fund, delays can reduce total revenues.
Division can do more to improve timeliness—The Division is making efforts to
improve timeliness through developing a system to automate applications. However,
it also needs to develop comprehensive policies and procedures.
􀁺􇩓 System being developed to automate applications—In an effort to improve
timeliness, the Division is working with the Department of Revenue (DOR) to
implement a system to automate the transmittal of employer application data.
Employers can submit applications either on paper or online through DOR’s
Web site. Beginning in June 2004, DOR began electronically transmitting to the
Division employer applications that it had received since January 2004.
However, because the Division has not yet implemented a system that can
automatically enter the applications into its own computer system, hard copies
of the employer applications are printed daily and distributed to division staff,
who then input the information into the UI employer tax system. Division
management anticipates that a fully automated application transmittal system
will be implemented by February 2005.
􀁺􇩄 Division lacks comprehensive policies and procedures manual—The Division
does not currently have a comprehensive policies and procedures manual for
tax determinations. Tax determination staff within the Division are expected to
maintain their own binders of various memos, e-mails, and training materials. A
2003 quality review report recommended that the Division create a formal
procedures manual to ensure that staff consistently apply policies and
procedures. A comprehensive and well-organized policies and procedures
manual should also help staff make determination decisions in a timely manner
by reducing the amount of time spent reviewing various memos and e-mails to
determine the correct procedures.
Office of the Auditor General
page 27
The Division is
developing an
automated application
transmittal system.
Division has difficulty meeting federal accuracy standards
Until 2003, the Division’s struggle with federal standards for accuracy has been even
greater than its struggle with timeliness. The Division reported that it did not meet
federal accuracy standards between 1998 and 2002. As with timeliness, accuracy
problems can negatively affect employers’ tax liability status. The Division has taken
several actions to improve accuracy, but can do more in this regard.
Division has struggled to meet tax determination accuracy standards—The
Division reported that it met federal accuracy standards in 2003 for the first time since
1998.1 Because it did not meet accuracy standards in the past, the Division was
under a corrective action plan in federal fiscal year 2004 to improve accuracy.
According to quality reviews conducted by division staff (see text box below), the
Division increased its new determination accuracy rate from 75 percent in 2000 to 90
percent in 2003. Arizona’s 2004 corrective action plan submitted to DOL shows that
the Division intended to improve accuracy through filling vacancies, increasing the
frequency of work reviews, and enhancing training.
Inaccurate determinations can lead to overpayment or underpayment of
taxes—A common error found in the Division’s 2003 accuracy review could result
in employers paying too much or too little in taxes. According to the reviewer’s
results, half of the failed cases showed an incorrect effective date for the employer’s
tax liability. The tax liability effective date is important because it represents the
quarter in which employers must begin paying UI taxes. If the liability date is
1 According to a division manager, the Division did not complete or report the results of its 1999 TPS review to DOL
because of a staff vacancy.
State of Arizona
page 28
The Division was under
a corrective action plan
to improve accuracy.
DOL Accuracy Standards
New Employer Determinations
DOL requires states to participate in a quality program called Tax Performance System (TPS) that
examines several aspects of tax performance, including new employer determination accuracy. As
part of this review, DOL requires states to review a sample of 60 new employer determination cases
each calendar year, excluding exempt determinations. This accuracy review intends to:
􀁺􇩃 Confirm that the state’s internal controls ensure accurate determination.
􀁺􇩄 Determine if the state is assigning correct tax rates to employers.
􀁺􇩃 Confirm that the state follows its own procedures.
Division staff review the sample cases based on a series of pass/fail questions. States report the
results of their reviews to DOL, which compiles the results along with other performance measures
in its UI PERFORMS annual report. DOL requires states to fail no more than six new employer
determination cases (10 percent) as part of its UI PERFORMS comprehensive performance system.
DOL validates the results of the states’ TPS reviews every 4 years. DOL is scheduled to validate the
results of Arizona’s calendar year 2005 TPS review.
incorrectly established before the employer is liable, the employer could pay more
taxes than necessary. Conversely, if the liability date is incorrectly established after
the employer is liable, the State could lose UI tax revenues.
Division should expand efforts to improve accuracy—The Division has made
efforts to continue to improve its determination accuracy. Specifically, in February
2004, the Division began holding monthly staff meetings to clarify procedures and to
allow staff to discuss issues related to employer tax determinations. Additionally, the
Division has filled one of its vacant supervisor positions. In addition to developing a
comprehensive policies and procedures manual as recommended in the previous
section, the Division can take the following steps:
􀁺􇩉 Implement a continuous training program—Although the Division has an initial
training manual for new staff, it has not implemented a refresher training
program for experienced staff. The 2003 TPS review cited the lack of continuous
training as an area of weakness. Continuous training is important to help ensure
that staff are consistently and accurately following procedures when making tax
liability determinations. Therefore, the Division should implement an ongoing
training program for tax determination staff.
􀁺􇩅 Ensure that management and supervisory positions are adequately staffed—
The Division has struggled to hire and retain a tax determination manager and
supervisors. According to the Division’s 2005 corrective action plan, the tax
determination manager position has experienced high turnover during the past
4 years. Since January 2004, the Division has not had a permanent manager to
oversee tax determinations. Additionally, as of October 2004, the Division had
not yet filled one of two supervisor positions that has been vacant since
December 2003. In August 2004, the Division filled its other supervisor position
that had remained vacant since June 2003. Management and supervisory
positions are needed to monitor the quality of work, provide feedback to staff,
and to verify compliance with state and federal requirements. The Division
should continue its efforts to fill tax determination management and supervisory
positions.
􀁺􇩄 Document reasons for removing failed cases from quality reviews—While the
results of the 2003 review indicate that accuracy has improved, lack of records
explaining the outcome for several of the cases made it difficult to assess the full
degree of progress made. The Division initially found that 11 cases (18 percent)
had failed the review—nearly twice as many as the 6-case maximum that DOL
allows. The final report showed that only 6 cases had failed. When asked to
explain why cases were removed from the list of failed cases, division staff had
to recreate their work because no records existed. In future accuracy reviews,
the Division should establish a policy to fully document the reasons for its
decisions for later verification.
Office of the Auditor General
page 29
Recommendations
1. To help improve timeliness, the Division should continue its efforts to implement
an automated application transmittal system.
2. The Division should develop and implement a formal policies and procedures
manual for tax liability determinations to help improve timeliness and to help
ensure that staff consistently apply state and federal requirements.
3. The Division should implement an ongoing training program to help ensure that
staff are consistently and accurately following procedures when making tax
liability determinations.
4. The Division should continue its efforts to fill tax determination management and
supervisory positions to help ensure that procedures are followed and to verify
compliance with state and federal requirements.
5. The Division should establish a policy to fully document its reasons for removing
cases from the TPS list of failed cases to ensure that outside parties can confirm
that its decisions to do so are valid and appropriate.
State of Arizona
page 30
Division should improve management of
employer refunds and audits
The Division can improve its management of employer refunds and audits.
Specifically, the Division should improve its process for issuing tax refunds to
employers. Internal reports indicate that in June 2004, over 25,000 employers were
eligible to receive refunds totaling $7 million, but the reports included large errors that
need to be corrected so accurate refund notices can be issued. Additionally, the
Division should continue working to improve its employer audit process to ensure
that it meets federal quality standards and quotas.
Division should improve its process for administering
employer refunds
The Division maintains a list of pending refunds for employers who have paid more
than they owe in taxes. However, its list of pending refunds contains inaccuracies due
to data entry errors. Once the Division has corrected these errors, it should develop
a system to more effectively notify employers of refunds.
Division should ensure that its pending refunds list is accurate—The
Division’s large list of pending refunds contains inaccuracies. According to the list,
as of June 2004, over 25,000 employers were listed as eligible to receive a total of
over $7 million in refunds. Employers are entitled to refunds when they have overpaid
their taxes—for example, because they incorrectly used a higher tax rate from a
previous year instead of their current lower rate. The amounts of the employer
refunds on the Division’s list ranged from $3 to $132,538. However, auditors
discovered that several of the highest amounts on the Division’s pending refunds list
resulted from data entry errors. For example, data entry errors resulted in showing a
$99,000 pending refund for one employer and $97,160 for another. Neither of these
employers was entitled to a refund. Although both errors were corrected in the
Division’s employer database, the $97,160 error remained on the pending refunds list
Office of the Auditor General
page 31
Employer refund
amounts ranged from
$3 to $132,538 as of
June 2004.
FINDING 4
for nearly a year. To help reduce staff time in reviewing data entry errors and to ensure
that employers are notified of legitimate refunds, the Division should analyze its
pending refunds list to verify that it is accurate and current with the employer
database.
Current process for issuing refunds is inefficient and results in some
inaccuracies—Two technicians in the Division’s employer accounting unit are
assigned to process employer refunds, which involves selecting employers from the
pending refunds list or other internal reports, reviewing the validity of the
overpayments, and then preparing the paperwork for issuing refunds. The
technicians are also responsible for processing employer requests for refunds.
However, according to a division manager, due to staffing constraints, one of the
technicians works primarily on administrative tasks, such as answering phone calls
from employers and maintaining logs of issued refunds. Therefore, a majority of
employer refunds are processed by one technician. According to internal reports,
division staff processed approximately 9,256 refunds during calendar year 2003,
which is below the Division’s internal standard of 12,600 per year. Internal reports
indicate that, as of June 2004, approximately 8,000 refunds on the Division’s pending
refunds list had remained unprocessed for over a year.
Although its process is intended to ensure that refunds are not issued in error, the
Division has failed to meet federal credits/refunds accuracy standards since 2000. As
part of the Tax Performance System (TPS) quality program that reviews several
aspects of tax performance (see text box, page 28), DOL requires states to fail no
more than 2 out of 60 selected credit balance cases. The purpose of this standard is
to ensure that credit balances are established correctly and employer refunds are
processed in an accurate and timely manner. The Division was under a continuous
improvement plan in federal fiscal year 2004 for failing to meet DOL’s accuracy
standards for establishing credit balances and issuing refunds. For calendar year
2003, the Division reported nine failed cases in its accuracy review. For example, one
case failed because the credit balance was applied to an incorrect employer
account. According to the Division’s federal fiscal year 2004 improvement plan,
several factors contribute to incorrect credit balances, including outdated
procedures, lack of ongoing training for experienced staff, and no back-up
procedures for instances when designated refund staff are absent.
Division should develop a system for notifying employers of valid
refunds—Once the Division has corrected the errors in its pending refunds list, it
should develop an effective system to inform employers of refunds. According to a
division manager, prior to 1999, employers were notified of overpayments through
the quarterly wage reports. This process allowed employers to deduct the
overpayment from their quarterly tax payment. However, problems related to the
timing of tax payments and subsequent adjustments to employer accounts
contributed to a decision to remove overpayment information from the wage report.
Although inaccurate, internal reports indicate that the number of liable employers with
potential overpayments has increased from approximately 13,000 in July 1999 to
30,000 in June 2004.
State of Arizona
page 32
The Division failed to
meet federal employer
credits/refunds accuracy
standards.
To ensure that employers receive refunds in a timely manner, the Division should
develop a system to more effectively notify employers of valid pending refunds. Other
states, such as Hawaii, Oregon, and Washington, notify employers of overpayments
through credit memos and allow employers to either deduct the amount from their
tax payment or request a refund. Specifically, Washington and Oregon issue credit
memos to employers each quarter.
Division should continue efforts to more effectively audit
employers
The Division has not met federal quality standards for employer audits for the past 6
years. Additionally, in calendar year 2003, the Division failed to meet the minimum
federal employer audit quota. To help ensure that it meets federal employer audit
standards, the Division has made efforts to improve its audit process. Specifically,
the Division has hired new staff and conducted an audit quality training session.
Additionally, the Division is in the process of implementing an automated system for
conducting employer audits.
Division’s employer audits failed to meet federal quality standards—DOL
requires states to audit employers
to ensure that wages, taxes, and
employees are properly reported.
For selected employers, the
Division’s field auditors review
documentation, such as payroll
records, tax returns, and bank
statements, to determine if the
employer complied with state UI
reporting requirements. To ensure
that states conform to federal audit
standards and practices, DOL has
established audit quality and quota
standards through its TPS program
(see text box). Specifically, DOL
requires that no more than 2 of 60
selected audit cases fail the quality
review. However, for calendar year
2003, the Division reported that 18
of its 60 selected audit cases failed
the quality review. The Division has failed to meet the TPS accuracy standards for
employer audits every year since 1998.1 According to a division manager,
inadequate staffing levels, inexperienced personnel, and the supervisors’ resulting
workload increases contributed to a less-than-comprehensive review of audits for
federal quality standards.
1 According to a division manager, the Division did not complete or report the results of its 1999 TPS review to DOL
because of a staff vacancy.
Office of the Auditor General
page 33
DOL Quality Standards
Employer Field Audits
Accuracy Review
In addition to examining 60 new employer determination cases (see text box on
page 28), DOL’s TPS program requires states to review a sample of 60 audit
cases each calendar year. This review is intended to confirm that the state met
quality standards for field audits. Division staff review the sample cases based on
a series of pass/fail questions. DOL requires states to fail no more than two audit
cases (3 percent).
Production Review
DOL requires states to report the total percentage of contributory employers
audited and the percentage of total wages audited. DOL’s Employment Security
Manual requires states to audit at least 2 percent of their contributory population
each calendar year.
The Division has failed
to meet employer audit
quality standards since
1998.
State of Arizona
page 34
Division was unable to meet federal audit quotas—In addition to maintaining
accuracy standards, DOL also requires states to audit at least 2 percent of their
contributory employer population each calendar year (see text box, page 33).
Although the Division reported that it consistently met or exceeded this quota in the
past, it failed to meet the quota during calendar year 2003. Specifically, the Division
completed 1,810 out of a total 2,141 required audits in calendar year 2003, which
represented 1.7 percent of the total contributory employer population. A division
manager stated that inadequate staffing levels in 2003 contributed directly to the first
decline in audit production to a level less than the minimum federal requirement. As
of the first week of November 2004, the Division had vacancies in 13 of its total 41
employer auditor positions.
Division has taken steps to improve audit quality—To help ensure that it meets
federal employer audit standards, the Division has made efforts to improve its audit
process. Specifically, the Division hired five new auditors in February and May of
2004. Additionally, in June 2004, the Division conducted a field auditor training
session to discuss the results of the calendar year 2003 TPS review. Auditors
contacted several high-performing states to determine how they meet federal quality
standards.1 Representatives from each state consistently mentioned automated
audit systems as aids in helping to pass federal quality standards. Automated audit
systems standardize audit worksheets and reports and prompt auditors to complete
the necessary steps in the audit. The Division is in the process of implementing an
automated system for conducting employer audits. The system is scheduled to be
implemented by the summer of 2005.
1 Auditors contacted representatives from Connecticut, Idaho, Utah, Wisconsin, and Washington because these states had
consistently passed DOL’s performance standards for field audits from 2000 to 2003.
Recommendations
1. To help reduce staff time in reviewing data entry errors and to ensure that
employers are notified of legitimate refunds, the Division should conduct a
comprehensive analysis of its pending refunds list to verify that it is accurate and
current with the employer database.
.
2. To help ensure that refunds are efficiently and accurately issued to employers,
the Division should update its procedures, fill vacant positions, and provide
ongoing training to experienced staff.
3. Once the Division has verified the accuracy of its pending refunds list, it should
develop an effective system to notify employers of credit balances to ensure that
they receive refunds in a timely manner.
4. To help improve its process for conducting employer audits, the Division should
continue its efforts to provide ongoing training to its auditors.
5. The Division should continue its efforts to implement an automated audit system
to help ensure that audit standards and practices are followed and help allow
for more efficient processing of employer audit data.
Office of the Auditor General
page 35
State of Arizona
page 36
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
ARIZONA DEPARTMENT OF ECONOMIC SECURITY
1717 W. Jefferson • P.O. Box 6123 • Phoenix, AZ 85005
Janet Napolitano
Governor
David A. Berns
Director
Ms. Debra K. Davenport
Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport:
We have completed our review of the revised draft performance audit report of the
Department’s Unemployment Insurance (UI) program. We have revised our response
initially sent to you on December 7, 2004, and this letter and the attachment reflect those
changes. The enclosure includes our response to the recommendations outlined in the
draft report.
The Department has already begun implementing the recommendations contained in
your report. In addition, DES is exploring the use of federal Reed Act funds for major
improvements to the technological infrastructure that supports the UI program, which will
assist in the Department’s improvements to timeliness and accuracy.
We appreciate the cooperation of your staff throughout the performance audit process.
If you have any questions regarding the response, please contact Patrick F. Harrington,
Assistant Director, Division of Employment and Rehabilitation Services at (602)
542-4910 or Thomas Colombo, Program Administrator for the Employment
Administration at (602) 542-3667.
Thank you for the opportunity to review the revised draft report.
Sincerely,
David A. Berns
Enclosure
Page 1 of 11
ARIZONA DEPARTMENT OF ECONOMIC SECURITY
SUNSET REVIEW DRAFT REPORT
RESPONSE TO AUDITOR GENERAL’S REVISED RECOMMENDATIONS
SECTION I-Response to Findings
Finding 1: Division should improve eligibility determination accuracy.
The finding of the Auditor General is agreed to and the audit recommendation is being implemented. In
addition, DES is exploring the use of federal Reed Act funds for major improvements to the technological infrastructure
that supports the UI program, which will assist in the Department’s improvements to timeliness and accuracy.
Auditor General Recommendations:
1. The Division should regularly analyze data from the BAM program to determine the causes of
errors and use the results to train staff in an effort to reduce errors.
The Department concurs with the recommendation of the Auditor General. The recommendation has
been implemented and will result in reduced process errors and overpayment estimates.
On September 1, 2004, the Benefit Accuracy Measurement (BAM) staff and Policy and Training staff
reviewed and updated BAM procedures to address collection and dissemination of data. The
Department of Labor reviewed and approved the updated procedures on October 15, 2004.
On September 7, 2004, BAM staff created a detailed monthly report that provided reasons for improper
payment or denial of claims. Policy and Training staff reviewed the report and determined trends of
common errors from October 7, 2004 through November 5, 2004.
Based on data provided by the BAM Unit, Policy and Training staff created a training curriculum to
address errors and began classes to educate UI Benefits staff on November 18, 2004. The classes were
completed November 30, 2004.
On November 17, 2004, Training and Policy staff also reviewed client caused errors and identified
methods to reduce client error. The work search log was the most common source of client error.
Policy and Training staff members are currently revising the form for simplicity and clarity. The form
redesign will be completed by January 2005.
Ongoing analysis of data from the Benefit Accuracy Measurement program will continue monthly to
determine common errors and be used to update training curriculum as needed. BAM Unit data will
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 2 of 11
also be utilized by supervisors to coach and train staff individually to improve the accuracy of their
determinations.
2. The Division should simplify and reduce the number of reasons adjudicators must select from
in making determinations.
The Department concurs with the recommendation of the Auditor General. The Division has
implemented the recommendation to simplify complex statements supporting determinations.
On March 10, 2004, Policy and Training staff requested UI Benefits staff to provide recommended
changes to reduce the number of reasons adjudicators could select when making determinations.
On June 1, 2004, Policy and Training staff began consolidating and simplifying the reasons
adjudicators must select from in making determinations. The revised statements were shared with UI
Benefits staff for comments on December 28, 2004. The system handbook will be updated by January
2005. Training of call center staff will occur by February 2005.
3. The Division should establish supervisory review standards in its formal policies and
procedures.
The Department concurs with the recommendation of the Auditor General. The recommendation has
been implemented to increase supervisory review of cases.
On May 10, 2003, the department established a supervisor review standard. Supervisors have been
expected to review four cases per month for each agent since that time.
On December 2, 2004, the Division developed a formal policy to include written performance standards
which require supervisors to conduct four reviews per month for each agent. Written acknowledgement
of these procedures was obtained in December 2004 and has been included in the supervisors’
performance expectations.
4. The Division should continue its efforts to provide additional training for supervisors on the
Benefits Timeliness and Quality (BTQ) standards to ensure that they apply them correctly
during supervisory reviews.
The Department concurs with the recommendation of the Auditor General. The recommendation has
been implemented to ensure supervisors apply correct review criteria to sampled cases.
On September 13, 2004, UI Benefits management staff requested specific feedback from the internal
appeals unit regarding common error trends.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 3 of 11
Policy and Training staff reviewed the error analyses and developed training curriculum to address
Benefits Timeliness and Quality standards (BTQ). Policy and Training staff began refresher training
for managers to apply review criteria correctly on November 18, 2004 and completed classes on
December 2, 2004. This training will be an ongoing process based on analysis of BTQ errors.
5. The Division should consider cross-training adjudicators and claims agents and rotating them
through the adjudications and initial claims units in the call centers.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented to ensure cross training and rotation of staff.
A thirteen week series of classes was developed for cross training of staff. Training will begin January
14, 2005, and is scheduled for completion by April 2005. The Division will begin rotation of cross-trained
staff by April 2005.
6. The Division should consider turning some of its current, temporary part-time positions into
permanent full-time or part-time positions that would qualify for employee benefits and hiring
qualified individuals from outside the UI program as adjudicators.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
To the extent possible within budgetary constraints, the Division will convert some temporary positions
to full time permanent positions. Workload projections will be monitored and duties assigned according
to the agency’s needs to maintain effective staffing levels.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 4 of 11
Finding 2: Division provided inaccurate employer tax information to IRS.
The finding of the Auditor General is agreed to and the audit recommendation will be implemented. In addition,
DES is exploring the use of federal Reed Act funds for major improvements to the technological infrastructure that
supports the UI program, which will assist in the Department’s improvements to timeliness and accuracy.
Auditor General Recommendations:
1. The Division should implement a quality control program to improve the accuracy of data it
submits to the IRS by:
a. Following IRS requirements to conduct an annual quality review of its FUTA certification
computer program;
b. Conducting a targeted review related to errors discovered during the audit;
c. Documenting the results of its reviews;
d. Correcting errors discovered in its reviews; and
e. Carefully testing any program changes made to correct these errors.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
During the audit, the Division was informed by the Auditor General that errors existed in the tape
provided to the IRS. Initial attempts to correct the programming still revealed errors during validation
by the department. DES completed additional corrective programming and performed further
validation of the data. After validation, a corrected copy was provided to the IRS on July 15, 2004.
Upon further review, on September 13, 2004, the Division determined that the entire Federal
Unemployment Tax Act (FUTA) Certification computer program should be rewritten.
This rewrite is necessary to ensure that the business requirements of the FUTA program are properly
satisfied and supported. This will ensure that the program is properly documented and contains only
clean, logical, and functional code. The rewrite began on September 13, 2004.
The rewrite of this program includes functionality that will allow for the identification of the source of
the data that is used to produce the IRS annual tape. It also includes the ability to validate the data sent
to the IRS through sampling of data from a file that will be created for such purposes.
The Division will ensure that both the Employment Administration Management Information Systems
and Policy and Training Unit work collaboratively to develop processes and procedures to ensure an
annual quality review of the computer program is conducted. Errors discovered during this quality
review will be addressed and corrected. The Division will complete the FUTA program rewrite and
associated validation tasks by February 2005.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 5 of 11
The impact of the Department providing inaccurate information to the IRS is limited to the employer
receiving notification from the IRS to contact the Department regarding their tax account to resolve a
discrepancy. Once the employer contacts the Department, the tax record will be reviewed to determine
the source of the discrepancy and the record will be corrected at that time. If the employer is liable for
additional taxes, written notification will be provided. If the employer overpaid, a credit balance will be
established or a refund will be issued at the employer’s request.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 6 of 11
2. The Division should develop a system to track information related to FUTA recertification
requests, including employer state account number, federal identification number, and the
reason for the FUTA recertification. The Division should use this information to determine if
any programming errors exist and then correct them.
The Department concurs with the recommendation of the Auditor General. The recommendation will be
implemented.
Beginning in February 2005, Management Information Systems (MIS) will develop and test a new
automated system to track information related to FUTA recertification requests, including employer
state account number, federal identification number, and the reason for the FUTA recertification. MIS
and the Policy and Training Unit will ensure that impacted staff members receive training on the new
system. The Division will use this information to determine if any programming errors exist and then
correct them. The Division will implement this tracking system in March 2005.
3. The Division should update and revise its FUTA certification policies and procedures and
ensure that staff follow them.
The Department concurs with the recommendation of the Auditor General. The recommendation will be
implemented.
Beginning in January 2005, the Division will create an on-line handbook that incorporates FUTA
policies and procedures, along with a monitoring plan to ensure staff compliance with policies and
procedures. The Division will complete this task by June 2005. Training will be provided to staff
members by July 2005.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 7 of 11
Finding 3: Division should improve process for determining employer tax liability.
The finding of the Auditor General is agreed to and the audit recommendation is being implemented.
Auditor General Recommendations:
1. To help improve timeliness, the Division should continue its efforts to implement an automated
application transmittal system.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
On June 17, 2004, a collaborative effort between UI Tax staff, Management Information Systems (MIS),
and the Policy and Training Unit began to determine system and business requirements for an
automated application transmittal system.
The Division is currently testing the Joint Tax Application process developed in conjunction with the
Department of Revenue. The new web based system will distribute Joint Tax Applications to UI Tax
Employer Status Examiners for assignment of an employer account number and tax liability
determinations.
The Division’s MIS and Policy and Training Unit began development of the training plan and
curriculum on December 2, 2004. Training is scheduled to begin January 2005. The system
implementation date is February 2005.
An inventory reduction plan was deployed and untimely actions from 2003 were processed by November
30, 2004. The Status Unit is currently working on 2004 inventory. The Division recognizes that a
delayed determination can have negative results for employers and claimants and result in a loss of
state tax revenue. Additional staff members are being hired to focus on completing the oldest
applications as a priority assignment to reduce this impact. Workload projections indicate that the
inventory will be current by June 2005 which is a year earlier than anticipated in the State Quality
Service Plan.
2. The Division should develop and implement a formal policies and procedures manual for tax
liability determinations to help improve timeliness and to help ensure that staff consistently
apply state and federal requirements.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 8 of 11
Beginning January 2005, the Division will develop a comprehensive on-line policies and procedures
handbook, which will be completed by June 2005. Training will be provided by July 2005.
3. The Division should implement an ongoing training program to help ensure that staff are
consistently and accurately following procedures when making tax liability determinations.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
Status Unit management began monthly meetings to review unit processes and procedures on October 6,
2004. Common liability issues and error trend analysis was also conducted. Status Unit management
will continue to conduct bi-monthly work reviews of each Status Unit Examiner’s product.
On November 16, 2004, topical refresher training was conducted to address common misapplication of
policy and to develop error trends. Monthly training sessions during unit meetings reinforce the correct
application of policy to ensure that staff members are consistently and accurately following procedures.
In addition, a monitoring component will be added to ensure that staff members are following policies
and procedures. The monitoring tool will be in place by February 2005.
4. The Division should continue its efforts to fill tax determination management and supervisory
positions to help ensure that procedures are followed and to verify compliance with state and
federal requirements.
The Department concurs with recommendation of the Auditor General. The recommendation has been
implemented.
On August 29, 2004, UI Tax management submitted hiring requests to fill management and supervisory
positions. The Status Manager position has been posted. The Status Unit Supervisor position has been
filled and all Program Service Evaluators.
On November 18-19, 2004, new management staff members were provided an orientation that included
a review of performance expectations, Department of Labor requirements, and local office procedures.
All management staff hired will be provided with this orientation. The review of performance
expectations will also be provided to the current management staff which will ensure complete
awareness of program requirements.
5. The Division should establish a policy to fully document its reasons for removing cases from the
TPS list of failed cases to ensure that outside parties can confirm that its decisions to do so are
valid and appropriate.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 9 of 11
The Department concurs with the recommendation of the Auditor General. The recommendation has
been implemented.
The Tax Performance System (TPS) review process is based on U. S. Department of Labor ET
Handbook 407. The TPS Manager has implemented an internal policy which fully documents why cases
are removed from the TPS list of failed cases. This policy is effective for the testing sample for calendar
year 2004. To date, no cases have been removed from the sample but the documentation process has
been established.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 10 of 11
Finding 4: Division should improve management of employer refunds and audits.
The Department concurs with the finding.
1. To help reduce staff time in reviewing data entry errors and to ensure that employers are
notified of legitimate refunds, the Division should conduct a comprehensive analysis of its
pending refunds list to verify that it is accurate and current with the employer database.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented to notify employers of their credit balances. Employer requests for a refund rather
than a credit will be processed upon receipt.
The Division began examining the refund process in May 2004. The TPS Manager worked with the
appropriate Units to devise a system that emphasized a credit balance. The Division notes that not all
employer payables are refunds since the employer may owe past UI taxes or will soon be liable for
another quarter.
On November 15, 2004, two staff members were assigned to conduct a comprehensive review of each
pending refund to verify accuracy prior to establishing a credit balance.
The UI Employer Accounting Unit Management is working with Management Information Systems
(MIS) to modify programming so that credit balances may be reflected on the employer’s Tax and Wage
Report, Form UC-018. The final specifications to change Form UC-18 have been submitted to MIS for
action. The Division will complete the changes necessary to implement this recommendation by April
2005.
2. To help ensure that refunds are efficiently and accurately issued to employers, the Division
should update its procedures, fill vacant positions, and provide ongoing training to experienced
staff.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
By June 2005, Employer Accounting Unit Management, MIS, and the Policy and Training Unit will
create an on-line handbook of policies and procedures that will incorporate the refund process.
Training will be provided by July 2005.
The Accounting Unit Manager and two Accounting Supervisors have been hired. Accounting Unit
Management has hired one accounting technician and has requested that 5 accounting technician
positions be filled. The Status Unit Manager position has been posted. A Status Unit Supervisor has
been hired. Management has hired six Program Service Evaluators and all vacancies have been filled.
Arizona Department of Economic Security
Response to Auditor General’s Revised Draft Recommendations
January 13, 2005
Page 11 of 11
Refresher training for experienced staff is scheduled for March 2005.
3. Once the Division has verified the accuracy of its pending refunds list, it should develop an
effective system to notify employers of credit balances to ensure that they receive refunds in a
timely manner.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
Employers will be notified of credit balances on the Tax and Wage Report, Form UC-18. This report is
mailed quarterly to registered employers. The Division began requirements documentation in
November 2004. The requirement specifications were completed on January 3, 2005 and sent to
Management Information Systems (MIS) for action. The Division will implement this recommendation
by April 2005.
4. To help improve its process for conducting employer audits, the Division should continue its
efforts to provide ongoing training to its auditors.
The Department concurs with the recommendation of the Auditor General. The recommendation has
been implemented and is an ongoing activity.
The Division conducted refresher and TPS field audit review orientation on June 15, 2004. The Field
Audit Manager now requires supervisory review of audits for all Field Audit offices.
Training and modification of audit forms for the Field Auditor’s use began July 7, 2004. Revisions to
audit forms will be completed by January 2005.
5. The Division should continue its efforts to implement an automated audit system to help ensure
that audit standards and practices are followed and help allow for more efficient processing of
employer audit data.
The Department concurs with the recommendation of the Auditor General. The recommendation is
being implemented.
The Division’s UI Field Audit staff, MIS, and the Policy and Training Unit have been working
collaboratively to develop, test, and implement an automated audit system since June 1, 2003. The
Division will complete system and end user testing, training, and implementation by June 2005.
03-L1 Competitive Electric Metering,
Meter Reading, and Billing
and Collections
03-01 Government Information
Technology Agency—
State-wide Technology
Contracting Issues
03-02 Registrar of Contractors
03-03 Water Infrastructure Finance
Authority
03-04 State Board of Funeral
Directors and Embalmers
03-05 Department of Economic
Security—Child Protective
Services—Foster Care
Placement Stability and
Foster Parent Communication
03-06 Arizona Board of Appraisal
03-07 Arizona Board for Charter
Schools
03-08 Arizona Department of
Commerce
03-09 Department of Economic
Security—Division of
Children, Youth and Families
Child Protective Services—
Caseloads and Training
04-L1 Letter Report—Arizona Board
of Medical Examiners
04-L2 Letter Report—Gila County
Transportation Excise Tax
04-01 Arizona Tourism and
Sports Authority
04-02 Department of Economic
Security—Welfare Programs
04-03 Behavioral Health Services’
HB2003 Funding for Adults
with Serious Mental Illness
04-04 Department of Emergency and
Military Affairs and State
Emergency Council
04-05 Department of Environmental
Quality—Water Quality Division
04-06 Department of Environmental
Quality—Waste Programs
Division
04-07 Department of Environmental
Quality—Air Quality Division
04-08 Department of Environmental
Quality—Sunset Factors
04-09 Arizona Department of
Transportation, Motor Vehicle
Division— State Revenue
Collection Functions
04-10 Arizona Department of
Transportation, Motor Vehicle
Division—Information Security
and E-government Services
04-11 Arizona Department of
Transportation, Motor Vehicle
Division—Sunset Factors
04-12 Board of Examiners of Nursing
Care Institution Administrators
and Assisted Living Facility
Managers
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Department of Administration—Financial Services Division
Government Information Technology Agency