Editorial: Make wrongly accused whole in jobless fiasco

Reparations are due to innocent residents falsely accused of fraud and robbed by a mismanaged state agency, but making this mess right could be a serious drain on the state budget.

From 2013 to 2015, the state’s Unemployed Insurance Agency automated system wrongly flagged more than 20,000 Michiganians for unemployment insurance fraud, an error rate of 93 percent. Many of these residents had their income tax refunds seized, wages garnished, and in some cases, were driven to bankruptcy. Those cases are under review and $5.4 million has been paid out in compensation so far. Court suits are pending.

The massive software mistake has led to proposed changes in the UIA’s governance and its benefits. Better oversight is needed of the technology. New legislation mandates that fraud determinations made by computers always be checked by humans before action is taken.

But that’s just the beginning of the agency’s problems. It is still not in compliance with a five-year-old audit, according to a January report, that found, among other things, a failure to pursue delinquent tax payments from employers and misclassifying employees as contractors.

Gov. Rick Snyder bounced the director of the agency in January and ordered a complete review of its operations. Last month, an inadvertent data dump put the personal information of 1.7 million state residents at risk.

The immediate priority should be reimbursing those wrongly accused of fraud and had their tax refunds and other resources seized, or had to write checks to the state.

Michigan should compensate these unfortunate folks for what they were forced to pay back, plus interest, and pay their legal fees and other costs. The victims of this mistake should be held harmless.

But doing so will have serious repercussions. The UIA Trust Fund became insolvent during the recession, accumulating $4 billion in debt at its nadir. Federal loans were taken out, deadlines passed, and penalties piled up. Michigan wisely chose to borrow money on the open market to pay the federal loans, and its current loans should be paid off in about 2019.

The Trust Fund balance is $3.1 billion. But there’s nothing sturdy about that number, Charles Owen, State Director of the National Federation of Independent Business, told The Detroit News on Thursday.

“It’s still in a very fragile state,” Owen said. “We’re still paying off the charge card, so to speak … the fund should be closer to $10 billion.”

If another recession hits and unemployment spikes, that $3.1 billion could be wiped out in months. But even just a dip in the fund would kick off various state and federal mechanisms to make sure the fund is replenished.

The mechanisms are taxes. The UIA Trust Fund is 100 percent funded by Michigan business owners who pay unemployment tax on an “experience” rating based on their unemployment history, ranging from 0.06 percent to 10.3 percent. Higher taxes on employers means fewer jobs.

Meanwhile, policymakers are engaged in reckless discussions. Senate Minority Leader Jim Ananich plans to introduce bills to reduce the penalty for fraud, lower maximum wage garnishments for fraud, increase the maximum unemployment insurance benefit to $483 a week (currently $362 a week), add supplement benefits for those with dependents, and extend UIA benefits from 20 weeks to 26.

That extra spending added to the obligation for compensating the wrongly accused would put the trust fund at risk.

Michigan should focus on fixing the technology and making sure those who were harmed are made whole before it adds more pressure on an already strained system.