Delaware’s Departments of Labor (DOL) and Finance delivered a joint report to legislative leaders Tuesday, recounting a former employee embezzling over $180,000 from the unemployment compensation fund in 2023.
The report outlines a perfect storm of inadequacies that could have contributed to the theft, including internal control deficiencies, failure to timely reconcile and detail reports and outdated financial management systems.
While the report says unemployment insurance operations have been historically underfunded and understaffed, the COVID-19 pandemic exacerbated the office's challenges even further, noting Congress laid the responsibility of providing increased economic support to residents through systems that were "old, outdated, and under-supported."
DOL says lack of funding prior to the pandemic left unemployment insurance staffed at only 68% of its authorized workforce, with fewer than 18 employees assigned to claims.
The report says the office is working "diligently" to modernize its underlying systems and technology — State Auditor Lydia York previously referred to the accounting systems as outdated.
"When I say antiquated, I really am talking 20th century," York said when the fiscal year 2023 unemployment fund was found to be "unauditable."
In York's special report on the unemployment fund, released earlier this year, she wrote: "The large increase in benefits and beneficiaries throughout the Covid-19 pandemic strained the resources of Delaware’s unemployment system, as it did unemployment programs across the country. Regardless, this does not excuse the failures of management that followed."
The joint report notes state officials have set aside $60 million of ARPA funds to modernize unemployment insurance's tax, reporting and benefits systems. The contract award was finalized in December 2023 and the project kick-off occurred in February 2024, slated to go-live no later than early 2027.
The report goes on to explain that a staff member notified DOL Human Resources of suspicious activity from a unemployment insurance administrator on March 31, 2023.
Later that day, the Director of Unemployment Insurance confirmed that checks totaling just over $180,000 had been issued in January and March 2023 to a business account at the the suspected employee's home address.
Secretary of Labor Karryl Hubbard reached out to the secretaries of the Department of Human Resources and the Department of Safety and Homeland Security to notify them of the allegations against the employee, but the General Assembly was not made aware of the theft until the information entered the public sphere in May of this year.
Last month, the Delaware Coalition for Open Governance (DelCOG) issued a letter arguing per Delaware Code, filing written reports is a statutory requirement of postaudits by the Office of the Auditor of Accounts to the governor, General Assembly and the public, including the disclosure of all illegal and unbusinesslike practices.
Following the release of the report, House Democratic leadership released a statement Wednesday calling the incident “deeply troubling” but clearly isolated and noted several legislative changes have already been made to help bolster the department’s infrastructure.
But Senate Majority Leader and Labor Committee Chair Bryan Townsend (D-Newark) still questions why the theft wasn’t brought to the General Assembly sooner and says although the report may satisfy the department’s legal obligation, it arrived over a year after the incident.
“We perhaps need to revisit our laws to figure out how to craft them so that we're not— we are not seeking to replace the role of the executive branch, but that these key incidents when they happen are brought to our attention on a more timely basis," Townsend said.
The report explains that on April 3, 2023, the suspected employee denied all allegations of theft and was immediately suspended pending a full investigation — he committed suicide later that day.
"Following the death of the [unemployment insurance] Administrator and a subsequent investigation by law enforcement, no person was charged with a crime. It appears there will be no indictment or trial associated with this theft as the perpetrator of the crime is deceased and there was not credible evidence that any other party knowingly assisted the perpetrator," the report says.
Although, DOL says they are "dedicated to recouping the stolen funds."
DOL, with the support of Gov. John Carney and the Attorney General’s Offices, retained counsel to represent DOL as the Personal Representative over the former employee's estate so that DOL would be in control of asset liquidation with the goal of recouping the maximum recovery possible.
DOL says it is unsure of the amount of funds it will be able to recoup, but it is known that the total assets documented in the employee's estate are 56% of the stolen funds.
Any amount recouped will be placed back into the Unemployment Insurance Trust Fund and reduce any recorded loss.
DOL says the remaining steps are anticipated to be completed by Fall 2024.
In addition to clawing back the stolen funds, the report outlines several other ongoing initiatives and recommendations to help prevent future thefts.
Among them is legislation to implement ongoing status notifications of any employee’s criminal history. Currently, background checks are required for nearly half of unemployment insurance employees and are conducted upon hire and updated every five years.
Just seven months after the suspected employee was hired, he pled guilty to theft from a homeowner’s association in 2019 and did not self-report the conviction to DOL.
DOL says implementing what's known as a Record of Arrest and Prosecution Back (Rap Back) service will alert the department of incidents like this.
“I think it definitely makes sense to look at that for early 2025. We had done that for the [Department of Technology and Information] employees, and it makes sense that for employees in particular who have access to key sensitive information or key control of finances that that level of check be instituted," Townsend said.
Other recommendations outlined in the report include expanding the Department of Finance’s Division of Accounting ability to monitor and assist with external accounting functions, exploring opportunities to expand the availability of ethics training, and enhancing funding for unemployment insurance technology, operations and human resources.
"I think that the report makes very clear that you have to invest in government if you want good government functions and services, and so the staff turnover, the loss of expertise, is something that I think can contribute to systems not working as well as they should, and so we have to be very mindful of that. We've got to invest in our people who we depend on to implement these really key services," Townsend said.
Townsend says he believes calling a Joint Labor Committee or an individual Senate Labor Committee to make changes aren't likely to happen until the legislative session starts back up in January.
"I suppose there's a chance that upon additional analysis and discussion among legislators, there could be some discussion about doing something earlier than January, but I largely doubt it. I think really, what the report shows, is that there's a thorough and detailed recount of what happened — you don't often then do special session hearings if you already have that information."
The report also details hiring outside contractors as early as 2021 to assist in remedying irregularities with unemployment insurance fund.
In fiscal year 2020, the Single Audit report found "the Department of Labor’s (DOL) reconciled book balance on the bank reconciliation did not agree to the balance recorded in the general ledger," noting a variance of over $113,000.
DOL then hired Belfint Lyons Shuman, Certified Public Accountants to address the findings, but the engagement ended due to "a lack of resources, failed unit leadership, and pandemic-related workloads."
Additionally, in April 2023, the Department of Finance’s Division of Accounting recommended DOL contract with Santora CPA Group following repeated financial reporting inaccuracies, and by the end of the year, Santora CPA Group informed DOL they would not be able to proceed with the engagement and could not provide an auditable trial balance due to "enhanced scope of work exceeding available resources."
Townsend says he has follow-up questions on these two contracts, finding their inability to produce results concerning.
"The report basically says that those two contractors— it turns out the contracts were not performed, or the performance of the contracts did not result in any progress, and so I'm very curious how much those contracts cost us, and what can we learn from the fact that there was no progress from them, such as, that sounds like a waste of resources," he said.
On Monday, DelCOG called for a federal investigation from the U.S. Department of Labor to examine how the state auditor handled the theft of the $180,000.
“The best case scenario is to have somebody who doesn't have a dog in this fight,” DelCOG board member and spokesperson John Flaherty said. “I think that's our ultimate goal, is to try to restore some public confidence in the administration of this fund.”
