GEF 1 - Room B205
201 East Washington Avenue
Madison, WI
Management: James Buchen, Earl Gustafson, Ed Lump and Dan Peterson
Labor: Phil Neuenfeldt, Dennis Penkalski, Red Platz and Patricia Yunk
Chair: Daniel LaRocque
Department staff present: Hal Bergan, Bob Whitaker, John Zwickey, Lutfi Shahrani, JoAnn Hium, Carla Breber, Ben Peirce, Carol Kincaid, Bill Bruggeman, Dick Tillema, Christopher O’Brien, Tracey Schwalbe, Andrea Reid, Brian Bradley, Troy Sterr, Tom McHugh, Bill Markhardt, Stephanie Keitch, Terese Wojick and Robin Gallagher
Others present: Larry Smith (UC Management Services), Michael Metz (WI Independent Businesses, Inc.), Bob Anderson (Legal Action of Wisconsin), David Silverks (WASS), Brad Boycks (WI Builders Assoc.), Ray Odya (Seek Inc.), Duane Harlow (DOJ), David Hart (DOJ), Jason Vick (for Representative Honadel) and Bill G. Smith (NFIB)
Mr. LaRocque calls the meeting to order at 9:50 a.m.
The first issue is EnABLES. This project was suspended on February 9th. The series of events that led to this began in 2001 when the decision was made to modernize the benefits and appeals system. There was pressure at that time from the Department of Administration and the federal government to modernize state systems. In 2002, the department decided to use “off the shelf” hardware, i.e., hardware with some built-in capabilities as opposed to doing everything from scratch. Given the information available, it was a reasonable decision at the time.
On November 6, 2002, the request for proposals was issued for the new system. In May 2003, Curam Software was chosen as the best alternative available. In July 2003, Tier Technologies was chosen as the integrator to aid in project management and also doing actual development work. At this time the cost for the system was about $1.2 million. In May 2004, we had accomplished the planning, gap analysis, installation of the base software, staff training, etc. Between July 2003 and May 2004, the department spent approximately $4.6 million.
On March 15, 2005, Release 1 was issued which dealt with imaging and work flow. It was immediately successful, although we refined some things and in May of 2005, issued Release 1.1, which improved the navigation and usability of Release 1. These releases were well accepted and we had excellent improved capabilities for benefits and appeals because of the imaging capabilities. It cost us more than we expected at that point, but we achieved very positive results.
In 2005, we still had a good cost/benefit analysis. In August 2006, those numbers looked less positive and we decided that we needed to revisit the project after Release 2. At that time the expected release date was late October, however, this was pushed back to mid-November, and then it looked like we would not make that date. There were three reasons for this. There were some fundamental technical problems that we had not been able to solve dealing with data conversion from the old system to the new system. Also, we did not have the correspondence system operating. Both of these were required for the release to go forward. Also, there was still not agreement between the project team and the users as to the functionality of the system. Results from the testing were mixed and there was disagreement over the readiness of the system. We had a conservative strategy to get the program working well before releasing it rather than implementing the program and fixing it later. We have a high degree of reliability and functionality with our system and we were not about to take a risk and have the system go down.
By late November, we had spent $9 million on Release 2 and did not have a release date. By January 2007, we had begun conversations about suspending Release 2 and the overall project. We consulted with Curam, since they had a stake in this project. They suggested we reset Release 2, but they could not give us a release date. We were faced with the choice of stopping now or rolling the dice that if we kept going we could get the project completed in a reasonable time and at a reasonable cost. We decided that was a risk we were not willing to take. The decision to suspend EnABLES was made in early February and announced on February 9th.
We are currently in a re-planning process. All assumptions are on the table. For the next few months we will be carefully evaluating all of the possibilities. Some of the assumptions from five or six years ago no longer apply. For instance, there have been a lot of changes in technological capabilities. Though the decision was difficult, there is some enthusiasm that we get to make a fresh start on this. We need to have a modern and up-to-date system, but there are many paths to that goal. The paths that we will emphasize are those that are manageable and cost-effective.
We have learned lessons in this process. The decision to purchase out-of-the-box software was understandable, but it turned out to be problematic. It was more problematic with a mature system like ours because of the amount of work involved. One of the items noted by the Legislative Audit Bureau on this and other state technology programs is the significant cost of recreating on a different platform capabilities you already have. We also learned that project management has to be excellent. You have to have good team chemistry and your ability to track your progress needs to be strong. For Release 1 we had those things; for Release 2 it was not as strong. As administrator, Mr. Bergan needs to insert himself more in the conflicts that occur between the team and users and make sure there is a process for resolving conflicts.
Last week Mr. Bergan was in Phoenix with other administrators. Many administrators are dealing with IT projects. Some states have had more success than others. Many are pulling back from big projects and are trying to move more conservatively because of the difficulty of management of these large projects. We also need to focus more on re-engineering before investing in IT. We need to evaluate our systems and how we do our business before setting up the IT projects. Also, we need to beware of the herd mentality with the national rush to modernize.
Mr. Bergan made the decision to suspend EnABLES in conjunction with the Secretary, and other people who have been involved in the project. This was a consensus decision.
There is a considerable “salvage” from the project. Defining our business requirements is part of it -- evaluating our program and our needs. That was very time consuming and detailed, and we have that now. Some of the things in Release 2 were refinements on Release 1. If it is possible and cost effective, we will try to roll them back into Release 1. For modernizing the appeals process, a lot of what we have done will be helpful. Mr. LaRocque notes that Release 1 is “salvage”.”
The department is looking into recourse against vendors. The department will do its fiduciary duty to see if there is any chance to recover from vendors. Doing the project “out-of-the-box” is an alternative to a customized system. We found that what we bought was not as useful for us as we had thought and that it was harder to work with the product than anticipated. It is not clear if that was because of the capabilities of the program or if there were misrepresentations by the vendor.
The basic decision was made in 2001 to modernize. Of the administrative assessment, about $2.3 million was used for the project. Most of the funding came from carry over from the federal grant. Release 1 cost about $13 million; Release 2 was about $10 million, and some of that will be useful. The department’s concern was in moving forward and the future costs as well. The department expects to use Release 1 for quite a while, but it depends on what the projected costs would be.
Release 2 would have been a different subject matter and would have automated the appeals process. This would have been the first automated appeals process in the nation. The model we used was to determine the requirements of the system closer to the time of deployment; this had benefits as a policy, but had problems of its own including with costs.
Questions: What is the status of the tax IT project (SUITES)? Was the administrative assessment started for the tax project before EnABLES?
Mr. Bergan: SUITES is scheduled to be implemented at the end of this year. It started prior to EnABLES. We are optimistic about it, but we will be diligent in keeping it on track. Mr. LaRocque: the assessment of employers for the administrative fund was passed in 1999.
Council member comments:
I have no problem with the decision that was made or who made the decision. However, as council members we should have been made aware of the decision before the media. It put council members in an uncomfortable position to read about the decision in the papers and not know about it. In the future, the department could contact council members with these types of major decisions before it hits the media.
Mr. Bergan: we knew he would be able to explain the decision more fully at the council meeting.
Comment: Council members need to be able to respond when people call and ask about media reports. Had they had information about the costs, they could have answered those calls and explained more about it.
Comment: It raises the question, not for today, of the role of the council as an advisory body. Do we focus on legislation and rules, or do we have a different advisory role. I was not sure if that was an area that the council would even comment on.
Comment: This comes up from time to time with administrative issues. We do not necessarily feel a need to second guess administrative decisions, but we would like to know about it.
Comment: It would be good to get the information before the media so council members can respond with defensible points. For instance, $23 million is a lot of money, but they could have explained that it is not wasted and much of it is working and more may be salvageable.
Comment: Council members warned the department about outsourcing this project at the time. Reviewing the role of the advisory council going into a budget year is always good; there is damage in overestimating it and in underestimating it.
The Minutes of the January 17, 2007 Meeting are approved unanimously with edits offered by Mr. Tillema.
Mr. LaRocque notes that copies of the briefs the department filed in the cases involving Wis. Stats. §108.04(5g), the notice/attendance provision, are available.
The Financial Outlook Report and the Report of the Activities of the Advisory Council were submitted to the Governor and full Legislature in February.
Carol Kincaid reports on the Department’s annual report on fraud. A summary Memo and the Report are distributed to the Council. In 2006 the Department began three new efforts to educate on how to obey the UI law. We now print security features on UI checks that will detect any attempt to alter the check amount of payee; added presentations to laid off worker groups outlining requirements and penalties; discussed at small employer group presentations the importance of verifying employee identity and monitoring UI payment reports.
We added some tools to prevent fraud. The payee name and dollar amount on all UI checks presented to our bank for payment is matched with the same information on our disbursement file; any mismatch is rejected and not honored. We now have a bank account block to prevent anyone from using our account number to initiate unauthorized electronic funds transfers. We also scan employer tax and benefit charge information to identify potential fictitious employers.
We have added new detection activities. On the tax side, we now do automated scans of employer tax information using the SUTA dumping detection software to identify potential cases of employer tax rate manipulation. Also, we now use 1099 information from the IRS to investigate employers who may be misclassifying employees as independent contractors.
The Report, page 3, shows the different types of fraud and nonfraud overpayment cases that were detected in calendar year 2005 and 2006, and the amounts of monies detected. Cross matches work well. Verification of low earnings is 30% of the overpayments (nonfraud) is when a person working underestimates earnings. Failure to report work and wages is not considered “fraud” if $1,000 or less in benefits are paid and there is no prior UI fraud. We warn the claimant to report correctly to avoid future forfeitures and prosecution.
We initiated a 0.5-time position in Department of Justice to prosecute UI fraud cases involving UI benefits of at least $5,000. Almost two-thirds of our claims and fraud cases come from Milwaukee County. However, the DA there would not prosecute without a signed confession.
Report page 7 shows our overpayment detection rates based on estimates. Our average overpayment detection rate this year is 72%, exceeding the federal goal of 59%, and ranks us 17th in the nation. The charts on pages 7 and 8 shows fraud and nonfraud overpayments recovered. The percentage collection rates seem to have improved dramatically from 2004 to 2005; this (federal ratio, the amount collected to the amount established) is partly a function of how many dollars are paid out in a given year.
We will continue to make program integrity a priority. We will also implement the cross check with the National Directory of New Hires, effective January 2008 at the latest. This will help us find concealment faster. All states will use the National Directory, so Wisconsin will benefit.
On page 3, the misidentification of independent contractors should show up in the wage record cross match if the wage is properly reported. If it is not properly reported, unless someone tells us about it or we do an audit, it will not show up. We might detect it in field audits or by tips and leads. The code “border checks” (on page 3, for $40) was likely miscoded.
AAG David Hart is introduced. He is excited about working on UI fraud cases. Of the 40 or so cases with DOJ, many are in warrant status. The AG seeks to make the process more efficient. The policy is to work out payment and recovery because these are special cases. The crime is working and not reporting it. Convictions are a last resort. They have 6 convictions now and have recovered a lot of money. More funding would better support this activity.
Duane Harlow is introduced. They are looking to recover funds quickly, deter fraud and determine case by case what justice needs to be meted out. The Milwaukee DA is no longer involved in these cases, as the AAGs are handling them.
Question: On your initial contacts with claimants on the telephone, have you started telling them about the enforcement now being done by the Department of Justice? The department may want to consider adding a warning that fraud is now being investigated and prosecuted by the AG. The word may get out and have a deterrent effect.
Ms. Kincaid: they are informed that there are consequences, including fines and jail time.
Mr. Bergan: the Department will be looking at program integrity in both the tax and benefits. Some industries try to avoid UI by characterizing employees as independent contractors. People complying with the law are being taken advantage of those who are not.
Comment: UI may benefit from teaming up with the Workers Compensation Division because independent contractors are an issue there as well. It is a bigger incentive for avoiding costs in workers’ compensation. Perhaps aligning the definitions would be helpful.
Most UI fraud is not sophisticated crime. It is generally a crime of opportunity for people who are poor and hope to get a little more money perhaps until their first paycheck at their next job. Seldom does an able and available issue result in fraud; but there may be an overpayment.
Question: Do you find employers who are suspected of fraud?
These would be “aiding and abetting” investigations, such as for independent contractors or paying someone in cash without reporting it as wages.
Regarding a recent news story about a fraud case, Mr. Bergan indicates that this involved the Legislative Audit Bureau. We requested that audit and the cross check with the prison system. They found two people in the prison system who were collecting benefits. If it is an easy and cost-effective cross-match, we would like to do it.
Mr. LaRocque indicates that the fraud dollars represent less than 1% of the total claims payments. We believe there may be more to be captured. We will want program integrity proposals and resources to deal with this. We are efficient in recovering but we are not identifying all of the opportunity out there. The fact that we are not prosecuting employers at this time does not mean we do not pursue them. We actively litigate civil disputes with employers continuously that are not referred for criminal prosecution.
Brian Bradley presents information and a handout on borrowing from the federal government. Hopefully we never get to the point of exhausting our reserves and having to borrow from the federal government, but this presentation is to explain the ramifications and conditions for borrowing. There is a cost to borrowing. In the 1980s the federal government changed the law to charge interest for borrowing. The interest rate is the lesser of 10% or the trust fund’s earnings rate for the fourth quarter of the previous calendar year. Currently the rate would be 4.64%. Under federal law, if a state has to repay interest, it cannot use the state unemployment tax to do this; the state would have to find a different funding source.
Question: Does that mean that nothing we are assessing the employers can be used to pay that? Would the solvency tax be used for that?
We could not use the solvency tax unless we changed the law. When we borrowed in the early 1980s for the first and only time, we put a provision in our law that created a special assessment for employers to pay the interest. The provision still exists in the law. In the 1980s when we borrowed, employers paid $122 million in interest on the loans. The interest rates at that time were all 10%.
There are provisions for interest free cash loans. These loans must be taken between January 1 and September 30. In order for them to be considered interest-free, they must be repaid by September 30 and there can be no additional borrowing in the fourth quarter. The UI cash flow makes it difficult to take advantage of these loans.
The government will not lend us money unless we have a zero balance in our trust fund account.
Federal law encourages states to repay voluntarily. However, federal law will reduce the credit allowed to employers against the FUTA tax while the money is owed. There is a credit reduction of 0.3% if the loan balance is outstanding on two consecutive January 1sts, and an additional 0.3% every following January, up to the 5.4% credit.
Question: Can the 0.3% credit reduction be more than that; is it a matter of discretion
Mr. Bradley indicates that it could be more. It is based on a formula. In the 1980s we would have had an additional 0.2% credit reduction. States can avoid a credit reduction by doing things that maintain fund solvency. The conditions are fairly stringent. A state must repay any advances that were made between November 10 of the previous year and November 9 of the current year. The state must pay the amount that the IRS would estimate that the tax credit reduction would generate.
In summary, there are certain ramifications of borrowing that affect the state program. Cost is an issue with additional interest. There is a potential increase in the federal unemployment tax with the reduced credit reduction. This is not an experience rated tax; it is a flat tax across the board on all employers. It depletes the state’s Reed Act balances because those must be used to pay benefits before borrowing. Also, it increases the FUTA tax during tough economic times.
There are two states with outstanding balances, Michigan and Missouri. Some states may have borrowed in other ways. Texas, for instance, used state bonding authority to borrow money rather than borrow from the federal government. It is possible that Michigan has been indebted on this for the past 20 years since the recession of the 1980s.
Comment: Texas has an AAA bond rating. It is not clear that Wisconsin would get as good an interest rate by borrowing in the same way Texas did.
Comment: In the last meeting we noted that we seem to have settled into a benefit level that is $300 million more per year than it was in the 1990s. We need to look into the data around that and break out why that is and try to explain it. It may be tied to the unemployment rate. Is this all explained by the expanded labor force or higher wages, or the change in duration of benefits?
Mr. Tillema indicates that the insured unemployment rate (IUR) would be the primary reason for this. There have been some increases in the labor force and benefits, but the predominant factor is the increase in the IUR. This is addressed in the Financial Outlook Report, Table 16. The duration of benefits tends to be low and constant.
Mr. Bergan indicates that the Department will take a look at this and try to answer the questions.
Mr. LaRocque indicates that the first letter is from Senator Grothman. This is a question of whether hourly workers in a school district would be paid unemployment benefits for a snow day. In most situations a person would have wages from the other days of the week that would offset a benefit payment. It would be an unusual circumstance that would permit someone to collect benefits for one snow day in a week. Carla Breber indicates that if there were a couple of snow days in a week, it is possible that a partial check may be payable. If a worker’s hours are concentrated on certain days of the week and the person misses those days of the week, they might be partially unemployed on those days.
Ms. Breber: the system looks at the weekly claim. As to Senator Grothman’s point that the employee will work in June, that opportunity in June has no bearing on whether they have missed wages on the snow day. A school district can offer an hourly employee an option to work a different day. If there is work available and they do it, there would be earnings; if they do not do it, then we would have to decide if it is a job refusal. We treat school employees as we would other employees.
Question: For the school year employees, it applies to summer breaks, etc. Does that apply to hourly school employees?
Senator Grothman’s inquiry is dealing with a week that is not a break or vacation holiday. Ms. Breber indicates that the feds require the educational employee disqualification be applied during between terms breaks and customary holiday/vacation periods for workers who provide service in a professional capacity, if the reasonable assurance criteria is met. They allow states to extend the disqualification to workers in nonprofessional capacities and Wisconsin has chosen to do that --- normally hourly employees fall into the nonprofessional capacity. However, States are not allowed to extend the disqualification for either capacity to other periods, such as the week with a snow day --- this is not a between terms or customary holiday/vacation period.
Ms. Schwalbe contacted Senator Grothman’s office, which forwarded the email from the West Bend School District, but it did not have details of a claim. It is not clear that anyone actually is claiming, just that one person may apply. The Department will respond to the letter.
Mr. LaRocque indicates that we received a letter from Representative Gronemus on the family corporation benefit reduction.
Comments: We discussed it previously. I agree with Representative Gronemus that the people should be taxed and covered or not taxed if they cannot collect benefits. The benefits are capped at four weeks for the child, but not allowed for the parent. This should be looked at again. The rationale must be more than just that the child needs the money and the parent does not. We need to have a rationale that makes sense. The issue was not resolved before. The department should write back to Representative Gronemus and indicate that we discussed it and this is an issue that will be looked at for inclusion in the bill.
Mr. LaRocque indicates that the Council talked about the issue and the risk for fraud in these cases. The four week disqualification was calculated to address the issue of the repeat filer who draws more from the system than the employer puts in. However, we did not address the issue of not taxing the wages of these employees. There may be an issue regarding federal taxation.
Comment: The policy does not seem correct to say all the wages are taxed and one group gets benefits and one does not. You may be able to come up with other groups that would meet the same rationale but we do not apply the law to tax their wages and not provide benefits.
Mr. LaRocque: the benefit reduction is an underwriting tool for this class of employers; it may or may not be the best way to deal with the situation. As discussed last year, we were looking at systemic problems generated from that pool of employers. Mr. LaRocque will inform Representative Gronemus that the Council will look at this issue.
Comment: When we bring this up again it should be in the context of the process. We get many letters from constituents or others, but we cannot revisit every issue. If there is a Council member who wants to bring it up again, we can look at it.
Mr. LaRocque states that proposed DWD 133 was submitted to the Legislature on January 19. On February 13, the Senate Labor Committee met in Executive Session and passed a resolution asking us to consider modifying the length of time that employees have to provide notice to employers of the end of an assignment. We responded that we are willing to consider such modification. We drafted the modification to change the “first” full business day to the “second” full business day after the end of the assignment that notice must be given by the employee. It is a reciprocal requirement and thus affects employers’ notice as well. Also, we modified the length of time the employer has under sub. (b) for the notice to an employee of intent to make a new assignment. In sub. (3), we also clarified that the policy the employer would have to use to make the separation a quit by the employee must be the kind of policy described in the rule itself.
Motion passes unanimously to go into closed session pursuant to section 19.85(1)(ee) of the Wisconsin Statutes. Closed session is held.
Meeting is adjourned
Updated
March 25, 2013
Unemployment Insurance Division,
Bureau of Legal Affairs (BOLA)