Labor warns states: fraud crackdown or federal penalties

The U.S. Labor Department warned all 50 state governors they must tighten unemployment insurance oversight or risk losing future federal funding. In letters described as putting governors “on notice,” the department pointed to poor monitoring, outdated technol

By Wednesday, the Labor Department had made the message hard to miss: the next federal dollars for unemployment insurance are tied to how aggressively states police fraud and waste.

In letters sent to all 50 governors. the department warned that poor oversight. outdated technology. weak identity verification and lax controls have “allowed unprecedented fraud to flourish.” The department said states must get serious about fighting fraud and waste in unemployment insurance programs—or they won’t receive more money from the federal government.

“We are officially putting governors on notice,” Acting Labor Secretary Keith Sonderling said in a statement Wednesday. “The American people will no longer tolerate the blatant waste. fraud. and abuse of their hard-earned tax dollars — no state should allow it either. If states allow it, they will suffer the consequences.”.

The public focus on the warning came with a sharper edge in three states where Democrats run the government: California, Illinois and New York. In its announcement, the Labor Department cited problems in those states.

The agency’s own audit work looked at a sample of cases from last year and suggested that nearly $1 in $9 in unemployment insurance payments was an overpayment. It said most of those overpayments were for reasons other than fraud. The problems varied by state, but many involved work-search requirements or eligibility disputes after someone left a job.

That detail matters because it complicates the story the letters are trying to tell. The department said consequences from pandemic-era fraud “are still playing out,” and the warning lands after a period when unemployment benefits were reshaped during the public health emergency.

A nonpartisan estimate from the Government Accountability Office put fraud at between 11% and 15% of the amount paid out through unemployment insurance programs from April 2020 through May 2023.

For many states. the pandemic era reshuffled how quickly benefits could flow and how closely they were checked before money went out. During that time—which included the last months of Donald Trump’s first term and more than half of former President Joe Biden’s time in office—access to the funds was eased. and the government noticed issues as payments were made.

Still, the letters also leave an uncomfortable question in their wake: there doesn’t appear to be a strong connection between which party governs a state and the scale of overpayment or fraud.

California Gov. Gavin Newsom’s office pushed back quickly. blasting the move and criticizing what it called “lax regulations and rushed distribution” of unemployment benefits by the first Trump administration during the COVID-19 pandemic. Newsom spokesperson Marissa Saldivar said in a statement, “Meanwhile California outperforms other states in addressing fraud.”.

Illinois Gov. JB Pritzker took a different tack, arguing the department’s approach was too thin on substance. He criticized what he said were the Labor Department’s vague threats. saying in a statement that the Trump Administration continues to govern by press release and that the White House has been cutting resources used to modernize systems and prevent fraud.

The Labor Department said more directives would follow in the coming weeks, extending the pressure beyond a single announcement.

The unemployment insurance letters fit into a broader scrutiny of state-federal programs that rely on Washington funding. Vice President JD Vance is overseeing an anti-fraud task force focused on potential misuse of social programs.

Other parts of the administration’s push have drawn resistance. The Department of Health and Human Services tried to withhold money for child care subsidies and other social service programs from five states—all governed by Democrats—but a court rebuffed the effort. The Department of Health and Human Services has also announced it’s using artificial intelligence to police how states and other recipients of federal dollars audit their programs.

The Department of Agriculture has threatened to withhold administrative funds from states that don’t provide data on participants in the Supplemental Nutrition Assistance Program, including their immigration status.

For governors now receiving the unemployment warning. the stakes are straightforward: tightening oversight and identity verification systems costs money and takes time. but the department is tying that work to future federal funding. And with audits pointing to large overpayment rates—often tied to eligibility disputes and work-search requirements—the question hovering behind the letters is whether states will be judged on the parts of the program that are hardest to fix. or the parts most politically visible.

Geoff Mulvihill’s report includes contributions from Associated Press writer Sophie Austin in Sacramento, California.

U.S. Department of Labor unemployment insurance fraud state governors Keith Sonderling federal funding unemployment overpayments California Illinois New York Government Accountability Office JD Vance Trump administration