State unemployment insurance systems still run on code as old as 50 years in some states, according to a 2023 federal audit, because replacing a benefits-paying system while it keeps paying benefits is one of government IT's hardest problems: states cannot take the system offline to rebuild it, so modernization happens in pieces, funded in grant cycles that do not always survive a change in administration. A $1 billion federal infusion aimed at fixing this ran into exactly that problem in 2025, when Washington canceled a portion of the grants mid-project.
How Old Are These Systems, Really?
The Government Accountability Office reviewed unemployment insurance IT systems in eight states and found their core systems ranged from about 7 to roughly 50 years old, with six of the eight states running modernization efforts that were underway but incomplete as of February 2023 (GAO-23-105478). The stakes of that age gap became visible during the pandemic: state UI systems paid out approximately $878 billion in benefits between April 2020 and September 2022, a volume the oldest systems were never built to handle (GAO-23-105478).
What Made States Struggle To Modernize?
GAO grouped the obstacles states reported into five categories: staffing shortages and lack of in-house technical expertise, contracting difficulties in procuring the right vendors, management gaps in running multi-year IT projects, financial constraints, and technical obstacles inherent to replacing a live benefits system (GAO-23-105478). States that did modernize reported a concrete payoff — improved system stability after migrating to cloud computing and fewer paper-based processes — but getting there required sustained funding across several budget cycles, not a single grant (GAO-23-105478).
What Did The Federal Government Actually Fund?
Congress routed roughly $1 billion in American Rescue Plan Act money through the Department of Labor for state UI modernization, and the department stood up a dedicated Office of Unemployment Insurance Modernization in 2021 to run it (U.S. Department of Labor). That funding was split across several grant tracks rather than one lump sum: IT modernization grants, fraud detection and identity-verification grants, equitable-access grants, and a Navigator program to help claimants use new systems, each governed by its own guidance letter (Department of Labor, Employment and Training Administration). In September 2024, day-to-day management of the program shifted from the temporary modernization office into the department's standing Employment and Training Administration, and in December 2024 DOL published customer-experience standards states are expected to meet — a recommendation GAO had pushed for (U.S. Department of Labor; GAO-23-105478).
Why Did Washington Pull Funding Back Mid-Project?
In May 2025, the Department of Labor canceled a set of ARPA-funded UI modernization grants that states had already been awarded and had built multi-year project plans around. New Jersey Governor Phil Murphy's office said the state lost access to three ARPA-funded grant programs it had been awarded in 2021, which had been funding streamlined applications, usability improvements, and fraud-prevention work, and called the timing especially damaging given economic uncertainty (Office of New Jersey Governor Phil Murphy). The federal guidance canceling the underlying ARPA documents did not specify a rationale in the text state agencies could point to (oui.doleta.gov).
What Happens When A State Loses Its Grant Mid-Build?
Wisconsin's Department of Workforce Development offers the clearest public accounting of what a mid-project cancellation actually costs. The department said the May 2025 termination hit grants earmarked to modernize its employer portal and expand claimant communication tools, and that losing the money forced the agency to abandon its planned move to a cloud-based system entirely — the state is now building modernized code to run on its existing on-premises infrastructure instead, a lower-cost but less capable path (Wisconsin Department of Workforce Development). That is the mechanism in miniature: a state plans a five-year IT build around a specific funding stream, the funding stream changes at year two or three, and the technical scope shrinks to match whatever money is left rather than what the system actually needs.
Which Parts Of Modernization Have Held Up?
Even with funding disrupted, some pieces of the effort have proven durable because they did not depend on continuous grant dollars. Wisconsin's current work — automating manual claims processing and upgrading the coding language behind its customer-facing and internal portals — continues using contracts already in place, and the state reports active project updates as recently as the fourth quarter of 2025 (dwd.wisconsin.gov). DOL's December 2024 customer-experience standards also survived the funding cuts, since they are a measurement framework rather than a grant, giving GAO's long-standing recommendation that DOL track state performance against real standards a path to actually being implemented (U.S. Department of Labor; GAO-23-105478). The pattern across both is instructive for any jurisdiction planning a multi-year system replacement: work that is structured as durable process — standards, procurement templates, in-house technical capacity — survives a funding interruption; work that is structured as a single grant-funded contract does not.
What Should Other States Watch For?
States still mid-build face the same choice Wisconsin already made: scale the project to match whatever funding is confirmed rather than what was originally budgeted, or pause and wait for funding certainty that GAO's own findings suggest is not guaranteed even under stable political conditions. Neither approach is specific to one party's administration — GAO's 2023 findings on staffing, contracting, and management gaps predate the 2025 cancellation and describe problems that persisted across the ARPA funding period regardless of which grants were active. What changed in 2025 was not the underlying technical difficulty of replacing old code; it was the assumption that a multi-year federal grant would still exist in year three.
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