Acting Labor Secretary Keith Sonderling has warned all U.S. states they risk losing federal funding for unemployment insurance benefits if they don't comply with anti-fraud efforts.
In a sweeping crackdown on waste, fraud, and abuse, the Trump administration on Wednesday put governors across all 50 states and U.S. territories on notice, threatening to withhold federal administrative funding from unemployment programs that fail to strengthen oversight and protect taxpayer dollars.
"We are officially putting governors on notice," Sonderling said, the Washington Examiner reported. "The American people will no longer tolerate the blatant waste, fraud, and abuse of their hard-earned tax dollars."
The effort is part of Vice President JD Vance's Task Force to Eliminate Fraud, which has been expanding its focus beyond federal programs and into state-run benefit systems.
According to letters sent by the Labor Department first reported by The Wall Street Journal, states that fail to improve safeguards could lose administrative funding used to operate unemployment insurance programs — a step federal officials say has never before been taken.
Officials argue the unemployment system became a prime target for fraud during the COVID-19 pandemic, when more than 40 million Americans filed claims and states rushed to distribute benefits.
Estimates from the Government Accountability Office place pandemic-era unemployment fraud between $100 billion and $135 billion, making it one of the largest fraud scandals in U.S. history.
The Labor Department specifically highlighted blue states California, New York, and Illinois as examples of states struggling with fraud, improper payments, or administrative failures.
California alone remains more than $20 billion in debt to the federal government after borrowing funds to support its unemployment system during the pandemic, the Journal reported.
Federal officials contend years of fraud, improper payments, and mismanagement contributed to the problem.
Inspector General Anthony D'Esposito said federal officials intend to aggressively pursue accountability.
"The days of excuses are over," D'Esposito said. "States that fail to protect taxpayer dollars should expect consequences."
The administration is pushing states to modernize aging technology systems, strengthen identity-verification requirements, and implement tighter controls to ensure benefits go only to eligible recipients.
Conservatives have long argued that weak verification standards and outdated state systems invite fraud and undermine public confidence in government assistance programs.
The Heritage Foundation and other policy groups have called for reforms that would require stronger identity checks and increased oversight of unemployment benefits.
Critics, however, argue that not all improper payments constitute fraud and contend some states need additional federal support to modernize their systems rather than threats of funding cuts.
Labor experts have noted that administrative errors and outdated technology contribute significantly to improper payment rates nationwide.
Still, the Trump administration has made clear that states failing to address fraud risks could face serious consequences as Washington intensifies its campaign to safeguard taxpayer-funded benefit programs.