WASHINGTON – Overpayments in the unemployment insurance system cost taxpayers billions of dollars every year, including millions of dollars in benefits going to convicts in prisons across the nation, according to a House panel.

The House Ways and Means Subcommittee on Human Resources held a hearing focusing on ways to “end cash for convicts” and improve the integrity of the unemployment insurance system.

Rep. Dave Reichert (R-Wash.), the subcommittee’s chairman, said reports from several states suggest that millions of dollars have been paid wrongly to individuals who are not able and available for work because they are incarcerated.

“New Jersey, there were 20,000 inmates who collected over $24 million. In Illinois, another $2 million was misspent this way. Millions more were wasted in South Carolina, Tennessee, Texas, and Wisconsin,” Reichert said. “It is an injustice that the tax dollars of law-abiding citizens are paying for these benefit checks for people who have broken the law and simply should not qualify for these benefits.”

Reichert, a former sheriff, introduced a bill in July that aims to block states from paying unemployment benefits to prisoners. The Permanently Ending Receipt by Prisoners (PERP) Act would also instruct states to use currently available prison data to make sure they are not paying benefits to inmates.

Reichert said some improper payments are being made to prisoners because in many states, the inmates themselves are expected to report their new residence in prison, which would stop the payments. Not surprisingly, said Reichert, few inmates volunteer to stop collecting these checks.

The UI program’s emphasis on expediting delivery of the checks before verifying that they are going to the right person has been one of the main problems driving this issue. Better use of data systems could prevent these sorts of improper payments from being made, Reichert said.

Pennsylvania’s secretary of labor, Julia Hearthway, said her state has stopped more than 4,000 unemployment compensation claims during the year’s first quarter by using a checking system designed to stop inmates in county and state prisons from receiving unemployment benefits.

Hearthway explained that when a new inmate enters a prison, the system automatically compares the person’s information with unemployment compensation rolls maintained by the state’s Department of Labor. If a match is found and verified, the individual is removed from active unemployment compensation benefits status.

The system is projected to bring savings of more than $100 million this year. The Pennsylvania Department of Labor bases its savings estimates by calculating the average duration of an unemployment compensation claim and average weekly benefit with the number of stopped claims.

The department is also cracking down on unemployment compensation fraud by using software to block claims using foreign Internet Protocol addresses and foreign area codes, said Hearthway. Nearly 4,000 foreign IP addresses were blocked during the first six months of this year.

Hearthway said Pennsylvania has two provisions that prevent people from collecting benefits while incarcerated. One is the broader federal requirement that a person must be ready and available to work, and the other is the state’s explicit ban on incarcerated individuals from enrolling in the benefits program.

The benefit payments to convicts are only one small aspect of the broader issue of improper UI payments.

“The total cost of abuse in this system that can go to those folks that really need it is $58 billion,” Reichert said. “That’s the total amount of UI improper payments over the last five years.”

According to the U.S. Department of Labor, the improper payment rate in fiscal year 2012 for unemployment insurance benefits was 11.4 percent, or $10.3 billion out of $90.2 billion.

The federal-state UI program, created in part by the Social Security Act of 1935, is administered under state law based on federal requirements. The program provides temporary, partial compensation for lost earnings of eligible individuals who become unemployed.

Applicants of UI benefits must have earned at least a certain amount in wages or have worked a certain number of weeks to be eligible. In addition, these individuals must be available for and able to work, and actively search for work.

Most of the overpaid funds end up in the hands of three types of people: those who continue to file claims even though they have returned to work, those who are not actively searching for a job, those who were fired or quit voluntarily.

The UI overpayment typically results from an administrative error.

“Most of the overpayments in the UI system are for reasons of non-fault. Either because there was agency error, employer error, or claimant error,” said Sharon Dietrich, a managing attorney for Philadelphia-based Community Legal Services.

Dietrich said that fewer than one out of four overpayments were found to be fraudulent. She said unemployment compensation fraud cannot be tolerated, but urged that it be examined in the context of overpayments of benefits.

“Sometimes, there is a tendency to conflate fraud with overpayments, the latter of which are all circumstances in which people received UI benefits for which they were later determined to be ineligible. In the vast majority of cases, these overpayments are ‘non-fraud,’ meaning that the worker was not intentionally trying to defraud the system,” Dietrich said.

She said overpayments cover all situations where people receive unemployment compensation benefits for which they are later determined to be ineligible.

Dietrich also noted that overpayment of unemployment compensation benefits is on the rise because of inadequate federal funding for state programs, which leaves administrators and staffers overburdened.

Valerie Melvin, an official at the Government Accountability Office, said that state agencies rely on outdated information technology systems to collect and process the tax revenue that funds the UI program, determine eligibility, and administer benefits.

“The majority of the states’ existing systems for UI operations were developed in the 1970s and 80s. Although some agencies have performed upgrades throughout the years, many systems are reported to be outdated, costly, and difficult to support, and incapable of efficiently handling workload demands,” Melvin said.

Dietrich urged the panel to put an emphasis on improving criminal justice system databases so the information used to identify incarcerated persons is up to date and reliable. Nevertheless, she said there are more significant ways to avoid or reduce UI overpayments.

“While I understand the outrage around people who are incarcerated collecting benefits, clearly this is a small subset of claims that are found to be fraudulent, much less overall overpayment numbers,” she said.