The Trump administration's labor chief has opened a new front in his campaign against states, threatening to slash administrative funds over unemployment fraud without releasing evidence to support his accusations.
Keith Sonderling, the acting U.S. secretary of labor, sent letters to 53 states and territories demanding action on what he called "waste, fraud, and abuse" in their unemployment systems. The threat to withhold funds marks the first time in history the department has dangled such consequences, according to the agency's own account.
"We are officially putting governors on notice," Sonderling said in a statement. "The American people will no longer tolerate the blatant waste, fraud, and abuse of their hard-earned tax dollars. If states allow it, they will suffer the consequences."
The gambit centers on three Democratic-led states: California, New York, and Illinois. Yet the Labor Department buttressed its case with selective data that doesn't hold up under scrutiny.
California faces a $20 billion debt on a pandemic-era federal loan, but that stems from a structural problem, not fraud. The state's unemployment payroll tax system hasn't changed since 1984, capped at $7,000 in taxable wages per worker with a maximum tax rate of 5.4%. Legislators from both parties have acknowledged the mismatch makes it nearly impossible to build adequate reserves. New York, the department claimed, loses roughly $2 million daily to fraud and improper payments combined, though it made no distinction between the two. Illinois shows a $320 million improper payment rate of 14 percent.
Here's the problem: improper payments are not fraud. Labor economists widely attribute them to aging technology systems, not criminal behavior. The national improper payment rate averages 14.9 percent. And when you broaden the lens beyond Democratic states, the picture shifts dramatically. Florida reported a 36.4 percent improper payment rate from 2021 to 2024, more than double California's 16.85 percent.
Michele Evermore, a senior fellow at the National Academy of Social Insurance, said the Labor Department is making the fraud problem worse, not better. "No state wants to pay fraudulent benefits to criminal actors," she said. "It should be an all of government response, instead of calling out governors they have a political beef with."
Sonderling doubled down on Wednesday morning, appearing on Fox News to warn that he would "essentially cut off the states' administrative funds" if they didn't comply. He again claimed Democratic governors oversee the states with the highest fraud rates, offering no data to back the assertion.
The department's hardball tactics extend beyond letters. In May, it ordered states to return any unspent funds from the American Rescue Plan Act, a demand that unemployment experts said would cripple ongoing efforts to modernize systems and catch actual fraud.
Federal investigators estimate pandemic-era unemployment insurance fraud between April 2020 and May 2023 totaled between $100 billion and $135 billion, according to the Government Accountability Office. The Labor Department has disputed that figure as inflated, though it has not offered a lower estimate of its own.
Author James Rodriguez: "Threatening to starve state agencies of money without hard evidence is a dangerous precedent, and it ignores the fact that some Republican states have equally serious improper payment problems."
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