An unprecedented surge in unemployment claims caused by this year’s COVID-19 shutdown, combined with major fraud, has drained Oklahoma’s unemployment insurance (UI) trust fund and requires an increase in associated taxes on employers, the head of the Oklahoma Employment Security Commission (OESC) told lawmakers Tuesday.

But that increase would likely be even larger had the state not maintained one of the nation’s best-funded unemployment trust funds prior to the pandemic.

“The reality of this situation is the UI trust fund needs to be replenished to continue to pay out benefits,” Shelley Zumwalt, director of the Oklahoma Employment Security Commission, told members of the Senate Business, Commerce and Tourism Committee during a legislative hearing.

Zumwalt, who was appointed to head OESC earlier this year, said state law requires the increased assessment on employers “because of the trust fund’s rate of depletion.”

The rates employers paid this year ranged from 0.01 percent to 5.5 percent. In 2021, those rates will be increased to 0.03 percent to 7.5 percent. Zumwalt said 72 percent of employers will face an increase at the low end of that range.

“I do want to acknowledge that that is an increase, and for many employers that is a significant increase from what they had previously paid,” Zumwalt said.

If employer rates are kept at current levels, and if the 2021 economy is “fair to good,” Zumwalt said the fund will receive $550 million to $600 million from employer payments next year. But she noted the fund has paid out larger amounts in pre-pandemic years.

“The fund has paid out this amount many, many times when we haven’t been experiencing a pandemic,” Zumwalt said.

While the agency processes around $214 million in claims most years, Zumwalt said that figure jumped to $356 million and $384 million in 2015 and 2016, due to a state economic recession, and ran as high as $600 million in 2009 during the last national recession.

Zumwalt said Oklahoma’s trust fund held $180 million for unemployment benefits two weeks ago. Today, it holds $130 million.

Gov. Kevin Stitt has devoted $100 million in federal CARES Act funding to the unemployment trust fund. Had he not taken that action, Zumwalt said the fund would likely be depleted to a level that triggers an automatic increase in employer rates of up to 33 percent across the board.

“This is not something that we’re definitely doing fine and the fund is solvent and we don’t have to worry about it,” Zumwalt said. “This is a closely monitored situation. And an up to 33-percent surcharge should give anyone pause.”

Zumwalt also noted 21 other states have depleted their unemployment funds so low they have been forced to take out federal loans to fill the gap, including in neighboring Texas and New Mexico. Interest on those loans is repaid through additional assessments on employers.

If the 2021 increase in employer assessments does not occur, Zumwalt said Oklahoma would likely have to resort to seeking a similar federal loan in the coming year.

Zumwalt said things would be even worse if Oklahoma had not started the year with the fifth-best-funded unemployment fund in the nation.

But even with those reserves, the huge increase in unemployment claims generated by the COVID-19 pandemic, combined with longstanding structural problems at the OESC, wiped out most of that funding and at times overwhelmed the agency.

The biggest challenge at the agency is the fact that its mainframe was installed in 1978.

“Nearly all of the agency’s current challenges can be tied back to this piece of technology that was installed over 40 years ago,” Zumwalt said. “The mainframe is still the main engine that runs the agency. Every claim, payment, or process the agency executes on must pass through this legacy technology. I say this, it feels like, almost daily: The mainframe will never improve. It’s never going to get any better than it is right now in this moment. And it will just continue to degrade.”

She said the agency needs to replace the entire system, noting much claims work must be now conducted manually because of obsolete technology.

Legislation approved in 2017 allowed the OESC to begin a five-year modernization process, but the agency was in only the first year of that process when the pandemic hit.

But even upon completion of that five-year plan, OESC officials concluded the agency would not be prepared to handle an event comparable to the COVID-19 shutdown in the future.

As a result, officials have revised the five-year plan and condensed it into an 18-month effort scheduled to be complete by the first quarter of 2021. The new plan will cost $45 million, rather than the $39 million previously projected. The modernization effort will be paid for using the OESC’s existing funds and federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding.

“What the pandemic has taught us is that this agency needs a complete and total transformation that changes the way the agency does business and gives claimants and employers the experience they deserve when interacting with our agency,” Zumwalt said.

OESC’s challenges were not limited to technology issues.

The agency began 2020 with a smaller workforce due to downsizing efforts that began in 2016 that reduced staff numbers by roughly one-fourth, Zumwalt said.

The OESC typically handled about 100,000 claims annually but handled 100,000 per month during the spring COVID-19 shutdown.

Massive fraud, experienced nationwide, also challenged the agency, which had no dedicated fraud department at the start of the pandemic. Most fraud seen during the COVID-19 shutdown involved stolen identities, which were tied in part to national data breaches that occurred in 2017. Zumwalt estimated as many as one million Oklahomans were victims of ID theft that could be exploited in unemployment fraud.

The agency has managed to deter much of that fraud in recent months thanks to new safeguards put in place.

Zumwalt said a slide showing benefits paid by the agency highlighted “how a process that had run steadily for decades could come close to completely falling apart in a matter of months.”

“The agency has paid out more this year since March 1 than it did the entire decade preceding the pandemic,” Zumwalt said. “I’m going to say that one more time. From 2010 to 2019, the agency paid out approximately $3 billion. Since March 1 through today, the agency has paid out $3.5 billion.”