The Trump administration is threatening to use “every available enforcement tool” to compel states to better protect unemployment benefits against fraud and abuse, which is elevated following an especially severe flareup during the pandemic.
The administration’s warning specifically suggests the possibility of cutting federal unemployment insurance administrative funding in states with high error rates.
Yet that warning includes a more powerful yet unspoken threat — of reducing federal benefits during the next recession unless states show they can protect those funds from repeated abuse.
The Department of Labor warns that the Trump administration is “officially putting governors on notice” that “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.”
The department’s warning specifically threatens “states that fail to safeguard these programs” by “withholding administrative funds…for the first time in history.”
Federal administrative funds, provided annually to states since the 1930s, are intended to promote “proper and efficient administration” of the UI program. Washington provides states around $4 billion per year to support program administration—a fraction of the $39 billion states spent on UI checks nationwide in 2025.
The administration threat suggests that, unless they do a better job preventing UI fraud, some states could lose some or even all of the federal dollars they now receive to administer those state benefits.
In most years, only state benefit dollars are at risk of being misspent, as federal benefits offered during high-unemployment periods are not available.
During the twelve months ending in June 2025, Labor Department data indicate almost no federally funded benefits were paid while states had an average 12.7 percent overpayment rate (which includes fraud and nonfraud overpayments) for state benefits.
Another Labor Department report finds that New York, driven by a 22.3 percent overpayment rate in 2025, was the leader in dollars overpaid at $735 million, followed by $546 million in overpayments in California.
Those large losses generally result in higher state payroll taxes, lower future state benefit payments, or a combination of the two, suggesting states should be most concerned by misspending.
That all changes, though, when the federal government makes available, and states pay out, large extended and expanded federal benefits during recessions. That was never more prominent than during the pandemic, when record federal benefits were paid—and lost to fraud and improper payments.
Official reports estimate that, in 2020 and 2021 alone, taxpayers lost at least $191 billion to improper payments. Temporary federal benefits administered by states proved especially vulnerable.
The fraud-riddled federal Pandemic Unemployment Assistance program had a 36 percent improper payment rate, which likely understated its actual losses.
Some private analysts suggest improper benefit payments exceeded a staggering $400 billion. Most was lost to international crime rings and will never be recovered.
If states cannot protect their own limited funds against fraud and abuse now, that’s a strong indicator that federal funds provided in a future recession will again be at grave risk.
So what might the administration do?
As the Labor Department threatened, it could reduce federal administrative funding for states with high error rates. That would certainly get states’ attention.
Even if they lost federal administrative funds, states with continued high error rates might still expect to receive large amounts of federal benefit funding in the next recession. They shouldn’t.
The biggest “enforcement tool” in the federal government’s arsenal is effectively the large federal funding states receive to pay expanded benefits during recessions.
States that can’t protect state dollars from fraud and abuse should not expect to get more federal funds to waste during the next recession, either.
Huge sums are potentially involved — and were recently lost. During the pandemic, federal taxpayers provided more than $700 billion in federal funds for temporary unemployment benefits, dwarfing roughly $200 billion in state UI spending.
Federal funds disproportionately flowed to blue states like California and New York and were just as disproportionately lost to fraud and abuse.
There is no reason federal taxpayers should provide such major federal benefits again if states cannot adequately protect them from being lost.
Holding states accountable for their ability to protect future federal funds is the real, if unspoken, hammer behind the administration’s recent threat. Now is the right time to wield that tool — before the next recession comes and it’s too late for states to improve their systems to protect rightful recipients and taxpayers.
