New York and 13 other states are suing the federal government over canceled grants intended to modernize unemployment insurance systems, including $17 million that Attorney General Letitia James says New York lost.
The attorney general’s announcement says the states filed in the U.S. Court of Federal Claims after the Department of Labor terminated grant agreements that had already been awarded and approved. The lawsuit seeks to recover the remaining grant balances and related damages; the allegations have not been resolved by the court.
The grants came from a $2 billion allocation in the American Rescue Plan Act to improve administration of unemployment benefits after the pandemic exposed delays, outdated technology and difficulty handling a surge of claims. States planned projects to replace aging computer systems, strengthen identity verification and cybersecurity, prevent fraudulent claims and improper payments, reduce backlogs, and make services easier for workers and employers to use.
States challenge the grant cancellations
According to James’ office, the Labor Department sent states letters on May 22, 2025, immediately canceling the grants. The letters said the projects no longer aligned with department priorities but did not identify the priorities or explain why the approved plans failed to meet them.
The coalition argues that the agreements allowed cancellation only in limited circumstances, not because a new administration changed policy priorities. It also contends the department imposed new terms after states began their projects and failed to give them a meaningful chance to contest the cancellations.
James’ office said a department spokesperson later criticized the grants’ focus on equitable access to benefits. The coalition argues that Congress itself directed the funding to promote equitable access alongside fraud prevention and timely payment. Those are arguments in the states’ lawsuit, not judicial findings.
“The federal government promised states funding to make these systems faster, safer, and more reliable, but then pulled the money after the work was already underway,” James said.
What the states are seeking
The states ask the court to restore the terminated funding and award damages, allowable interest, fees and costs. James’ office did not specify in its release which New York technology projects had begun or how the $17 million would be allocated if recovered.
The coalition includes the attorneys general of California, Colorado, Delaware, Illinois, Maine, Maryland, Michigan, New Jersey, New Mexico, Oregon and Wisconsin, and the governors of Kentucky and Pennsylvania. The case’s outcome will determine whether the states can recover the canceled grants; the release did not give a schedule for a ruling.
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