BOSTON (SHNS) - Massachusetts must pay the federal government $2.1 billion over the next decade after the Baker administration mistakenly used federal pandemic funds to cover unemployment benefits, officials said Monday. Gov. Maura Healey, who succeeded Baker in 2023, and her deputies unveiled details of a settlement they reached with the outgoing Biden administration Friday in which the Bay State will repay most but not all of the amount it owed due to the error committed years ago. The settlement saddles the state with a major new cost at a time when budget-writers are grappling with a series of other headaches and the unemployment insurance system already faces fiscal problems. Healey announced in the summer of 2023 that her team discovered the Baker administration improperly used about $2.5 billion in federal pandemic relief funds to cover jobless benefits that should have been paid by the state. With fees and interest, the total liability surpassed $3 billion, according to Healey's office, who said talks with with the U.S. Department of Labor reduced the amount owed to $2.1 billion over the next 10 years. The parties reached a deal at the end of last week, before Republican President Donald Trump took office. "We were dismayed to uncover early on in our term that the previous administration misspent billions of dollars in federal relief funds and that our state was facing what could have been a more than $3 billion tab to pay it back," Healey said in a statement on Monday. "For the past year and a half, we have engaged in extensive negotiations with the U.S. Department of Labor to minimize the impact on Massachusetts residents, businesses and our economy. Today, we have reduced our potential liability by over $1 billion and negotiated a decade long payment window to mitigate the impact." She added: "It is incredibly frustrating that the prior administration allowed this to happen, but we are going to use this as a moment to come together with the business and labor community to make meaningful reforms to the Unemployment Insurance system," she added. Payments will begin Dec. 1, 2025 and continue each year for the next decade, the Healey administration said. The agreement calls for principal payments to come from the Unemployment Insurance Trust Fund which is funded by a tax on employers and is also used to pay benefits. Interest payments will come instead from the state's General Fund. Healey's office said businesses will not face higher rates on their unemployment insurance payments through at least the end of 2026. After that, rates will depend on system reforms, Healey's team said. Healey pledged to pursue changes to lighten the burden on employers, who already face higher costs to cover a surge of claims during the COVID-19 pandemic. The governor instructed Labor Secretary Lauren Jones and Administration and Finance Secretary Matthew Gorzkowicz to "conduct a comprehensive review of the solvency of UI and assess potential reforms," her office said. Officials will seek input from business and labor leaders, and present ideas to Healey. Even before accounting for $2.1 billion in additional payments, the Healey administration projected the UI Trust Fund will be hundreds of millions of dollars in the red by the end of 2028. "The Massachusetts UI system is arguably the most abused, costly and anti-employer system in the country," said Retailers Association of Massachusetts President Jon Hurst. "Negotiating the $2.5B liability down to $2.1B is important, but this high cost cannot be simply added to the very high cost of doing business in the Commonwealth. The bad news is that this liability is very costly. The good news is that there is also now an opportunity to reform what has been for decades an impediment to new investment and job growth in Massachusetts." The retailers group said the state should draw from its $9 billion rainy day reserves "to pay for this state government error." The retailers said UI taxes paid by businesses are already spiraling upwards.    Christopher Carlozzi, state director of the National Federation of Independent Business Massachusetts chapter, said the "only solution" is for Beacon Hill to embrace major changes to reform a "broken" UI system. "It is incomprehensible that the state made a monumental error, and it's Massachusetts small employers that are required to today foot the $2.1 billion bill," he said. "Add this to the $2.7 billion they are currently paying back as a result of state-mandated Covid shutdowns that were beyond their control, and it paints a very clear picture as to why Massachusetts' businesses correctly feel like they are being crushed by one the worst unemployment insurance taxes in the nation." Healey's office rolled out details of the $2.1 billion settlement agreement alongside statements from Associated Industries of Massachusetts President Brooke Thomson and Mass. Taxpayers Foundation President Doug Howgate, both of whom called for urgency in pursuing UI reforms.