Labor Department threatens to withhold funds from states over unemployment program

The Department of Labor sent letters this week to unemployment agencies in 53 states and U.S. territories. The letters demanded action to address waste, fraud, and abuse in unemployment insurance programs and warned that administrative funds could be withheld.

Background on highlighted states The letters singled out California, New York, and Illinois. Officials said California owes the federal government $20 billion from a pandemic-era loan and noted ongoing difficulties repaying a similar loan from the 2008 recession.

Officials also stated that New York loses an estimated $2 million per day in unemployment insurance fraud and improper payments. They reported that Illinois recorded $320 million in improper payments, representing a 14 percent rate.

Improper payments and prior efforts Improper payments often stem from outdated technology rather than intentional fraud, with a national average rate of 14.9 percent. Several Republican-led states also report high improper payment rates, including Florida at 36.43 percent for 2021-2024.

In May 2025, the Department of Labor required states to return unspent American Rescue Plan Act funds. Unemployment experts said the requirement disrupted state efforts to modernize systems and combat fraud. Government Accountability Office data placed total estimated fraud in unemployment insurance between April 2020 and May 2023 at $100 billion to $135 million.