A routine audit has uncovered a potentially devastating error: Massachusetts mistakenly used about $2.5 billion in federal money to fund jobless benefits during the pandemic — payments that should have been made by the state.
State officials did not disclose how the mistake was made. It dates to 2020, but wasn’t found until recently, the Executive Office of Labor and Workforce Development said this week in response to questions from the Globe. The problem won’t affect unemployment recipients, the office added.
While the bookkeeping was botched during the previous administration, it falls to Governor Maura Healey to figure out how to reimburse the federal government. A pivotal question is how much of this cost — if any — will be borne by employers, who pay into the state unemployment trust fund to cover jobless benefits.
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The administration “is determined to provide a solution with the goal of minimizing impact to the Commonwealth,” Lauren Jones, secretary of labor and workforce development, said in a statement.
The US Labor Department declined to comment except to say it is “working with the state on options to rectify the situation.”
The Healey administration reached out to business groups on Wednesday, the same day the state comptroller’s office briefly mentioned the accounting error during a public meeting.
Employers are already paying additional fees into the trust fund to cover payments on $2.7 billion of bonds sold by the state last year. Proceeds from the bond sale are being used to repay federal loans the state took out to meet the huge surge in jobless claims during the pandemic, and to provide a cushion for the trust fund.
Business groups are upset by the prospect of having to pay even more.
“There needs to be some answers about what happened in the prior administration and who knew what, and when,” said Jon Hurst, president of the Retailers Association of Massachusetts.
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Hurst said most of his 4,000 members are paying more for the newly issued bonds than they are for their regular unemployment insurance taxes.
“As far as I’m concerned, I think employers are already paying more than their fair share for COVID, for layoffs they didn’t cause,” Hurst said.
The administration didn’t comment on possible options for financing the reimbursement. But business leaders wonder if the state would tap its remaining federal pandemic rescue funds and budget surpluses. That money totals about $1.6 billion, according to the Massachusetts Taxpayers Foundation, a business-backed think tank, while the state’s rainy day fund has a balance of about $7.2 billion.
Also, the unemployment insurance trust fund had more than $3 billion as of April, which includes infusions from the state. In the years leading up to the pandemic, fund levels generally fluctuated between $600 million and $1.9 billion, depending on the time of year.
“It is troubling to learn of this large overdraw of federal relief funds from previous years,” Jim Rooney, chief executive of the Greater Boston Chamber of Commerce, said in an e-mail. “But we applaud the Healey administration for uncovering these errors, being transparent, and we support their efforts going forward to minimize any negative impact for employers and workers.”
The state Labor Department said the misuse of federal money has its roots in the events of March and April 2020 when it was inundated by a flood of jobless claims caused by COVID-19 shutdowns. It was also scrambling to roll out a system to distribute new federal pandemic benefits for laid-off workers who didn’t qualify for state aid.
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But the department didn’t say how the mix-up of state and federal funds occurred or why multiple audits failed to catch it until recently, when the mishap was flagged by an outside firm reviewing the state’s annual financial report.
The debacle is just the latest to beset the state’s financially generous but technology-deficient unemployment system since COVID-19 put it in crisis mode.
Three years ago, criminal gangs managed to divert hundreds of millions of dollars in jobless benefits using identity theft. As recently as last month, the state said bot attacks had produced a surge in bogus unemployment claims.
A bigger fiasco unfolded in 2022 when the state determined it had paid $4.3 billion on more than a half-million jobless claims and then told recipients they might not have been eligible and would have to pay the money back. Eventually, the state waived most of the repayments.
Massachusetts isn’t the only state to be hit by fraud or to make mistakes when administering federal pandemic benefits known as Pandemic Unemployment Assistance for independent contractors, gig workers, and others not covered by state benefits.
“Every state made mistakes rolling out PUA,” said Michele Evermore, a senior fellow at the Century Foundation and a former Labor Department official who worked on modernizing unemployment insurance systems. “Things were just so chaotic.”
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Jones, the Labor and Workforce Development chief, didn’t say what options the administration is considering for repaying the federal government.
It’s not clear whether lawmakers would approve any use of state surplus funds for that purpose. A spokesperson for House Speaker Ronald Mariano said the speaker’s office is communicating with the administration about the issue and will monitor the situation.
“The administration reached out the minute they heard about the audit and talked to us,” said Brooke Thomson, an executive vice president at Associated Industries of Massachusetts. “AIM doesn’t feel our members should be responsible for the errors of the previous administration. . . . [But] my hope and my goal is that the business community is at the table to find a way to deal with this hole.”
Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd. Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.