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AG Nessel Sues Trump Administration for Terminating Funding for Unemployment Insurance System Improvements

LANSING – Michigan Attorney General Dana Nessel and a coalition of 13 other states filed a lawsuit last week on behalf of their state workforce agencies challenging the U.S. Department of Labor’s unlawful decision to terminate millions of dollars in funding for preventing fraud and implementing improvements in Michigan and other states’ unemployment insurance systems. The lawsuit, filed in the U.S. Court of Federal Claims, challenges the U.S. Department of Labor’s unlawful decision in May 2025 to terminate more than $45 million in plaintiff states’ remaining grant funding that was intended to assist states in modernizing unemployment insurance system technology and implementing measures to prevent fraud.

“Our Unemployment Insurance Agency plays a vital role in supporting Michiganders when they need it most,” said Attorney General Nessel. “The Trump administration’s attempt to unilaterally cancel these grants midcycle strips crucial funding meant to modernize technology, block fraud, and protect our state’s system. Cutting off these resources only serves to harm our workforce and disrupt the essential services Michigan residents rely on every day.”

Congress created the grants at issue as part of the American Rescue Plan Act (ARPA) of 2021, amid the pandemic-related surge in unemployment claims. The goal of the program is to improve the technology used to administer states’ unemployment insurance programs to better detect and prevent fraud, promote equitable access, and pay benefits in a timely fashion. 

In total, the Department of Labor awarded more than $780 million to states to modernize their unemployment insurance systems.

Six different grants were offered to states through the program:

  • IT Modernization Grants, to develop resilient unemployment information technology systems that can continuously adapt to changing conditions and integrate evolving fraud prevention technologies.
  • Integrity Grants, to strengthen unemployment insurance program integrity through ID verification.
  • Navigator Grants, to help eligible workers learn about and apply for unemployment insurance benefits (i.e. navigate the unemployment insurance program) and support states in delivering timely benefits.
  • Tiger Team Grants, to implement recommendations from multi-disciplinary experts in the areas of fraud prevention, equitable access to benefits, and payment timeliness.
  • Equity Grants, to help eliminate barriers to access, improve timeliness of payments, and ensure equity in fraud prevention activities.
  • Fraud Prevention Grants, to guard against improper payment reduction, assist overpayment recovery and other fraud prevention and detection efforts.

The U.S. Department of Labor reviewed and approved project plans under each grant program and set multi-year agreed upon performance periods in which the projects were to be completed. Plaintiff states directed hundreds of millions of dollars in grant funding to projects that, once completed, would increase efficiency, help prevent and detect fraud and the improper use of federal unemployment insurance funds, improve resilience when the system experiences surges in claims, and improve the customer experience.  

On May 22, 2025, the Trump administration’s Department of Labor sent letters to the coalition state workforce agencies that abruptly and unlawfully terminated each grant agreement. The termination letters stated the agreements “no longer effectuate [Department of Labor’s] priorities for its grant funding.” The grant terminations rescinded unexpended funds under the grant agreements, interrupting the unemployment insurance modernization work that the Department of Labor had approved and agreed to fund.

Consequently, approved projects were halted in the middle of the performance periods. States have had to reallocate funding from other sources, scale back project scopes, or cancel projects altogether. The terminations have wasted funds and squandered opportunities to increase efficiencies for unemployment insurance system workers, employers, and administrative staff. Michigan was awarded $6.78 million in Equity grants, $2.83 million of which was clawed back by the Department of Labor, as well as $4.47 million in Tiger Team grants, $1.41 million of which was clawed back.

In its lawsuit, the coalition argues that the Department of Labor’s grant terminations breached the express terms of each of the plaintiffs’ grant agreements. The terms of the grant agreements—which are enforceable as contracts between the federal government and the States—do not allow the Department of Labor to unilaterally terminate the grant projects prior to the end of the performance periods simply because the administration has changed its priorities. The coalition also argues the Department of Labor breached the implied duty of good faith and fair dealing by wrongfully imposing new terms and conditions, relying on an erroneous and bad faith interpretation of relevant regulations, relying on an erroneous and bad faith interpretation of authorizing statutes, and failing to provide plaintiffs with formal notice and an opportunity to object to the grant terminations.

The states are seeking money damages as part of the lawsuit.

Attorney General Nessel was joined by the attorneys general of California, Colorado, Delaware, Illinois, Maine, Maryland, New Jersey, New Mexico, New York, Oregon, and Wisconsin, as well as the governors of Kentucky and Pennsylvania.

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