Healey said error was ‘avoidable’ after state wrongly used $2.5 billion in federal money to pay jobless claims

Governor Maura Healey.Craig F. Walker/Globe Staff

Governor Maura Healey said Friday she is hoping Massachusetts can avoid having to reimburse the national government for $2.5 billion in federal money the state wrongly used to fund jobless benefits under her predecessor, a mistake she called “avoidable.”

The state is in discussions with the US Department of Labor after a routine audit found that Massachusetts used federal money — when it should have used state funds — to pay for billions of dollars in jobless benefits dating back to 2020 during former governor Charlie Baker’s administration. The mistake continued into at least 2021, according to a report issued Friday by the state comptroller’s office.

The error was found only recently, the state 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, but state officials have not disclosed how the mistake was made.

“It certainly was avoidable. Why it happened, I’m not sure, and we’ll try to get to the bottom of that,” Healey said in an interview Friday following an unrelated event in Newburyport. “It was a big surprise to us.”

The goal of talks with federal labor officials is to “resolve it without any impact to the Commonwealth or to employers,” Healey said, noting that the process of paying out unemployment benefits during the pandemic was “incredibly complex.”

“It was fast-moving, [and] there were constantly changing rules and requirements by the federal government with respect to programs and the disbursement of funds,” the Cambridge Democrat said. “That no doubt contributed to some of the confusion and the complexity that we’re dealing with now, that we inherited now.”

Baker, who left office in January, now is serving as president of the NCAA. In a statement, Baker adviser Jim Conroy did not address how the error happened. But he said the Republican’s administration sought to address problems when “complications were discovered,” noting that it engaged the firm KPMG to help reconcile the balance of the state’s unemployment insurance trust fund.

A report KPMG issued in December 2021 identified $300 million the state owed the federal government, but other than roughly $400 million in credits owed to employers, it “did not identify any other items associated with the period reviewed that would impact” the balance of the state’s unemployment insurance trust fund.

“The administration worked hard to rapidly set up new processes to ensure claimants received much-needed unemployment payments during an unprecedented time, including distributing tens of billions of dollars in benefits over two years,” Conroy said.

The situation has spurred a host of questions that, so far, remain unanswered, including how the mixup of state and federal funds occurred or why multiple audits failed to catch it until recently. The mishap was flagged by an outside firm, CliftonLarsonAllen, that the state comptroller hired to review the state’s annual financial report.

The comptroller’s office previously used KPMG to perform such reviews until its contract expired. CliftonLarsonAllen, or CLA, has performed them for each of the past two fiscal years.

Michael Sangalang, a spokesman for the comptroller’s office, said the firms typically review a sampling of transactions each year. But in the case of the state’s unemployment benefits system, the comptroller’s office receives not individual transactions to review but what Sangalang described as a “summary” of information.

On top of that, he said, the flood of federal money into the state during the pandemic further “raised the complexity of the funds going in and out of this account to a scale that’s fairly unprecedented.”

“We’re fortunate it was eventually caught,” Sangalang said.

The big question hanging over the business community is: What to do about it?

If the state is forced to reimburse the federal government for some or all of the money, business leaders have speculated about several options that state officials might consider, including pulling from the state’s budget surplus, turning to the state’s $7 billion-plus rainy day fund, or passing on some additional cost to employers.

Healey on Friday said she was not yet considering where the state would seek to draw the money from should it need to.

“Right now, I’m not contemplating that. Right now, I’m focused on addressing this with the US Department of Labor,” she told the Globe.

Chris Carlozzi, of the National Federation of Independent Business, said he believes “everything is on the table at this point.”

“[But] after all that’s fallen on employers in the last three years, we should not have something additional on top of that,” he said.

Business leaders are already feeling the pain from the need to pay back $2.7 billion in bonds that the state sold last year to cover its previously known unemployment insurance debts to the federal government, and to build a cushion in the state’s unemployment insurance trust fund following massive COVID-19-era layoffs.

As a result, employers now face a new COVID charge on their unemployment insurance bills to pay back the bonds over nearly a decade, Carlozzi said. He noted, however, that the cost has been offset at least somewhat by a lower rate structure for the regular unemployment payments that was made possible by the infusion of bond money into the unemployment trust fund along with the regular employer contributions.

Carlozzi said many of his members complained to their legislators about the new COVID assessment during a lobbying day his group recently co-hosted at the State House. The Massachusetts Legislature did set aside $500 million in late 2021 to help ease the burden of shoring up the insurance fund, but Carlozzi said many other states provided much larger amounts of financial assistance to their employers.

The issue came up again on Friday in a previously scheduled Zoom call between business group leaders and two key Healey administration officials — her labor secretary, Lauren Jones, and her economic development secretary, Yvonne Hao.

Those on the call said they learned little new information. Jones addressed the issue, and said the Healey administration is working with the US Department of Labor to resolve it. She also said she could empathize with the participants: As recently as last year, she sat on these calls as a representative for the Massachusetts Business Roundtable, until Healey tapped her for the secretary’s post.

Roundtable president JD Chesloff said he believes Jones and the rest of the administration is trying to be as transparent as possible.

“There’s a seat at the table for the business community to help figure this out,” Chesloff said.

Greg Reibman, president of the Charles River Regional Chamber, said he wanted to make it clear on the call that after all small and mid-sized businesses have suffered during the COVID-19 pandemic, they should not have to pay up for this mistake made by state government.

“The thing I said is, ‘I know it doesn’t need to be said, but it needs to be said: This can’t land back on the laps of the business community,’” Reibman said. “We just can’t afford that to happen to us.”