The state’s three grants originally totaled $20.699 million, and a 14-state lawsuit seeks damages for funding withdrawn from technology, access and fraud-prevention projects.
TRENTON, NJ – New Jersey has joined 13 other states in suing the federal government over its cancellation of grants for unemployment insurance system improvements, including funding to update New Jersey’s claims technology and hire fraud investigators.
The lawsuit filed Oct. 9, 2026 in the U.S. Court of Federal Claims alleges that the U.S. Department of Labor breached grant agreements when it ended the awards on May 22, 2025, before approved projects’ funding periods expired. The coalition is asking for monetary damages.
New Jersey’s three affected awards originally totaled $20,699,000, according to Attorney General Jennifer Davenport’s announcemen. That is the combined value of the original awards. Neither the announcement nor the complaint provides a separate figure for New Jersey’s remaining unpaid balance.
The dispute concerns investments in the system used to process claims and protect unemployment funds. New Jersey’s regular unemployment benefits are paid through a payroll tax supported by employers and workers. Those benefits partially replace wages for eligible people who lose their jobs through no fault of their own.
What New Jersey’s grants covered
The New Jersey Department of Labor and Workforce Development received three grants beginning in fiscal year 2023:
| Grant | Original award |
|---|---|
| Information technology modernization | $11,250,000 |
| Unemployment insurance integrity | $2,609,000 |
| Unemployment insurance equity | $6,840,000 |
| Total | $20,699,000 |
The state said the awards supported improvements to the unemployment claims system, a move to a cloud-based platform and investigatory staffing to identify fraud. Davenport’s office said the cancellations would prevent security updates, system improvements and program expansions.
The Labor Department’s 2023 funding guidance explains how technology and fraud prevention were connected. Integrity grants supported identity verification, fraud detection and recovery of overpayments. Technology grants supported changes such as cloud migration and replacing parts of older systems with components that could be updated separately.
Access improvements also addressed payment accuracy. The department explained that clearer application forms could help workers submit accurate information and reduce improper payments.
Why the federal government funded the work
The American Rescue Plan Act of 2021 provided $2 billion for unemployment administration improvements after the pandemic exposed weaknesses in state systems. The funding supported fraud prevention, access to benefits and timely payments to eligible workers.
Congress later reduced that appropriation to $1 billion through the Fiscal Responsibility Act of 2023. The Labor Department’s July 2023 guidance said approximately $500 million in funds not yet committed remained available at that point. That congressional reduction preceded the separate May 2025 cancellations.
The department ultimately awarded approximately $780 million through the related grant programs, according to the California attorney general’s announcement. Across the states, the programs financed computer upgrades, identity checks, assistance applying for benefits and changes recommended by federal teams reviewing state operations.
The problems extended beyond aging computers. In a June 2022 report, the U.S. Government Accountability Office added unemployment insurance to its High-Risk List, citing persistent service problems and financial losses. It found that pandemic demand worsened delays, complicated the rollout of new benefit programs and increased exposure to identity theft and other improper payments.
GAO recommended a coordinated federal plan addressing service delivery and financial risk. Its recommendation remained open and partially addressed on the report’s updated status page, which noted that Labor Department officials said in April 2026 that they were reviewing their previous approach against the administration’s priorities.
Improvements New Jersey had already made
New Jersey’s modernization effort produced some changes before the grants were terminated, and the state continued reporting completed improvements afterward.
In a December 2025 account of its unemployment system work, the state Labor Department said it launched a rebuilt online application in May 2024 with simpler language, fewer questions and questions that change based on an applicant’s answers.
The department said the redesign reduced application completion time by as much as 45 to 47 minutes compared with the previous system. It also reported implementing a cloud-based phone system in 2024 and deploying a fraud-prevention system using analytics to identify suspicious claims.
Those completed changes establish that modernization involved several projects at different stages. The cancellation dispute concerns the funding available to continue approved work; the state’s announcement does not provide a project-by-project accounting of what New Jersey stopped, continued with other money or left unfinished.
The federal government’s explanation
The Labor Department said it ended the grants because they no longer matched its funding priorities and because it was reviewing American Rescue Plan spending.
In written responses to Congress accompanying its fiscal year 2026 appropriations testimony, the department said the review would assess spending efficiency and consistency with administration priorities. It said it might consider new funding opportunities afterward and that terminating existing awards preserved flexibility.
The department estimated that up to $400 million nationwide could be recovered from the cancellations. It cautioned that a final amount depended on outstanding obligations and termination costs. That nationwide estimate is separate from the more than $45 million in remaining funding identified in the plaintiff states’ announcements about the October lawsuit.
When asked for analysis showing how the cancellations would reduce waste, fraud and abuse, the department declined to answer because the matter was in litigation. It said states continued to have access to regular federal funding for unemployment program administration.
A department spokesperson also criticized the canceled projects’ emphasis on equitable access, Nextgov/FCW reported in May 2025. The spokesperson said the administration remained committed to preventing fraud and working with state agencies.
The states’ legal argument
The 34-page complaint, filed as Maryland Department of Labor et al. v. United States, case No. 1:26-cv-01505, contains seven counts alleging breach of contract and violations of the obligation to perform agreements in good faith.
The states argue that their agreements did not authorize termination simply because the administration changed its priorities. They also argue that the federal regulation cited by the department could not override the grant terms or Congress’s direction to support access, fraud prevention and timely payments.
The complaint alleges that the department imposed new conditions after the agreements were executed and failed to provide an adequate opportunity to contest the terminations. It says states had to stop projects or divert money from other needs.
A related case had already addressed the interpretation of the cancellation rule. On July 17, 2026, U.S. District Judge Indira Talwani ruled in New Jersey v. U.S. Office of Management and Budget that the regulation did not permit agencies to terminate awards based on goals or priorities identified after the grants were awarded.
That Massachusetts case requested a declaration of the rule’s meaning. The opinion expressly explained that the states were not seeking damages or other relief concerning grants already terminated. The October complaint cites the ruling in support of its separate claims for compensation.
The new lawsuit is co-led by Maryland and Wisconsin. Along with New Jersey, the coalition includes California, Colorado, Delaware, Illinois, Kentucky, Maine, Michigan, New Mexico, New York, Oregon and Pennsylvania.
The states request damages in an amount to be determined at trial, allowable interest and legal costs. The court will have to determine whether the agreements support the states’ contract claims and what compensation, if any, is owed.