state and local

Fourteen States Sue the Labor Department Over $45 Million in Cancelled Unemployment System Grants

A coalition of states has sued the Labor Department in the US Court of Federal Claims to recover more than $45 million in cancelled grants for modernising unemployment insurance systems and fighting fraud. Illinois Attorney General Kwame Raoul leads the suit, with Wisconsin and Maryland as co-leads. California, Colorado, Delaware, Maine, Michigan, New Jersey, New Mexico, New York, Oregon and Washington joined, along with the governors of Kentucky and Pennsylvania.

The grants

The money came from the 2021 American Rescue Plan Act, which gave the Labor Department funds to help states fix the unemployment systems that buckled during the pandemic. The department awarded more than $780 million nationally. On 22 May 2025 it sent termination notices saying the grants no longer furthered the agency’s priorities.

Illinois says it lost more than $15 million. Wisconsin lost $29 million, including $11.25 million for an online portal for employers. New Jersey’s loss is reported at about $20.7 million.

The states claim breach of the grant agreements, no chance to object before termination, and bad faith. Because they seek money owed under contracts, they filed in the Court of Federal Claims, which hears money claims against the government, rather than in a district court.

The case builds on earlier wins against grant cancellations. In July 2026 a federal judge in Massachusetts, Indira Talwani, ruled that OMB’s rule allowing agencies to cancel grants that no longer serve “agency priorities” can’t be applied to grants awarded before the rule took effect. Courts have also ordered the restoration of FEMA’s cancelled resilience grants and some of DOE’s clean energy awards.

Why it matters

Unemployment insurance is run by states but paid for by a federal-state partnership, and its systems are some of the oldest IT in state government. During the pandemic, fraud losses ran into tens of billions of dollars, much of it through weak identity checks. The cancelled grants were meant to fix that before the next downturn.

With unemployment at 4.2% and job growth slowing, as covered in our economy post, states want those systems ready. The suit also tests a wider question: how far the Court of Federal Claims will go in making the government pay for grants it cancelled mid-stream.