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Dems chart path to borrow money for Ill.’s shaky unemployment system for third time in two decades

Illinois State Capitol
Brian Mackey/WUIS

Update: After this story was published Thursday morning, the Illinois Senate passed the unemployment insurance appropriation bill later that day and Gov. JB Pritzker signed it on Friday, March 25.

Breaking a decades-long tradition in shared sacrifice, the continued deepening of partisan animosity in the state legislature left Democrats voting by themselves Wednesday night on a plan to begin paying back the $4.5 billion of federal debt Illinois accrued over the last two years as the COVID-19 pandemic brought the state’s unemployment system to the brink.

Republicans, envisioning electoral victories in what could become a GOP wave year, refused to get on board with the majority party’s plan to spend $2.7 billion of the federal COVID stimulus money allocated to Illinois in 2021, daring Democrats to spend most of the state’s remaining American Rescue Plan Act dollars to pay off the unemployment debt — or else be labeled fiscally irresponsible.

But Democrats, who for years have endured and mostly survived GOP attacks on their spending records, forged ahead, easily passing the measure set for Gov. JB Pritzker’s signature in a matter of days after a vote in the Democratically controlled state Senate as soon as Thursday.

The $2.7 billion — a full third of the $8.1 billion in Illinois’ ARPA funds — is more than had been previously floated either publicly or in months of private negotiations on how to handle the state’s unemployment debt. But even with that surprise boost, the state will still have to find another source to fully pay off the $4.5 billion it owes the U.S. Treasury.

The most likely funding scenario is a case of deja vu: Just like after the economic downturns of 2001 and 2008, Illinois could go to the bond market to raise a yet-to-be-agreed-to sum. And like it’s already done twice in the past two decades, Illinois may trade one interest rate for another, borrowing from private lenders to pay back what it borrowed from the feds.

Further negotiations

Paying down the debt incurred to pay down the original debt has historically meant leaders in Illinois’ influential business lobby agreed to increases in the unemployment insurance or “payroll” taxes companies pay in exchange for cuts in benefits agreed to by organized labor, another powerful nucleus in Illinois politics.

But April 1 is a key federal deadline for states to use ARPA money to pay down debts in their unemployment trust funds. If Illinois were to blow that cutoff date, the state would be forbidden from cutting unemployment benefits in any way until 2025.

As that deadline approached, pressure mounted to divorce the amount of ARPA spending from a larger deal on the specific mix of borrowing, plus corresponding increases to business taxes and cuts to unemployment benefits, as well as the time period over which changes could be phased in.

State Rep. Jay Hoffman (D-Swansea) declined to get into specifics about negotiations, but told reporters after Wednesday night’s vote that the business community’s latest proposal this week included $2.5 billion in ARPA spending, so legislative Democrats decided to top that figure.

“As we’ve looked at the problem, we've understood that in order to get agreement, we needed more money,” Hoffman said.

Asked if he was at all worried that eliminating the April 1 deadline pressure would disincentivize working toward an overall deal, Hoffman reiterated what was at stake if Illinois didn’t spend the ARPA money on time.

In a tweet after Wednesday night's vote, Illinois Manufacturers' Association President and CEO Mark Denzler called it a "positive step forward." But according to a report published by Crain’s Chicago Business, business leaders claimed “talks have broken off indefinitely.”

Organized labor sources declined to comment on the state of negotiations late Wednesday night, but told NPR Illinois that labor still expected talks to resume Thursday “with the goal of creating long-term stability in the [unemployment] system.”

Tax revenues fluctuate throughout the year, meaning the state’s unemployment trust fund is typically best funded each spring after businesses file their taxes with the state. But the Illinois Department of Employment Security takes year-end snapshots of the trust fund to compare its health on an annual basis. Prior to the pandemic, the fund closed out 2019 in the strongest year-end position it had been in years, with nearly $2 billion built up.

Hannah Meisel/NPR Illinois
Illinois Department of Employment Security

A little more than a week after COVID was declared a pandemic, a top IDES official told business and labor leaders who serve on the state’s Employment Security Advisory Board that the agency’s best available modeling showed the trust fund might slip to $1.24 billion in 2020, then $380 million in 2021.

But the true effects of COVID and the accompanying recession quickly dwarfed those predictions; the fund reached a low of $263 million at the end of June 2020, after nearly four months of radically increased unemployment claims in addition to IDES standing up a federally supported program to allow 1099 contract workers to collect unemployment insurance for the first time ever.

But IDES has also struggled with fraudulent claims, paying out millions to potential fraudsters posing as Illinoisans with no jobless claims, as well as those who can't file for unemployment because a criminal got to IDES with a fake claim first. Some of that money has contributed to Illinois' unemployment fund debt, but IDES leaders have repeatedly declined to give an exact number — most recently this week during agency Director Kristin Richards' Senate confirmation hearing — citing ongoing investigations.

Hannah Meisel/NPR Illinois
Illinois Department of Employment Security

In late June of 2020, Illinois also began receiving advance loans from the federal government in order to keep its trust fund operational. At the end of 2020, the fund was $3.65 billion in debt, and would continue to add nearly $1 billion in more to its tab throughout 2021, albeit at a much slower rate. The fund didn’t even need to borrow more from the feds during five months last year.

The federal government didn’t begin charging states for interest on the advance loans until a waiver ran out in September. Since then, Illinois has racked up nearly $63 million in interest fees.

After Illinois uses its $2.7 billion in ARPA money to pay down some of its unemployment insurance trust fund debt, it will have $1.8 billion more to contend with.

Hannah Meisel/NPR Illinois
U.S. Treasury

Cyclical pattern

The semi-regular cycle of crash-and-borrow for Illinois’ unemployment insurance trust fund makes it an outlier among states, despite falling smack in the middle on measures like maximum weekly benefit amounts and number of weeks an unemployed worker can collect benefits. Illinois has, however, lagged behind other states’ unemployment rate comebacks after both the Great Recession and during the current economic recovery.

While the unemployment fund’s poor fiscal health is momentarily in the spotlight once again, those on both sides of the aisle are pushing for an infusion of cash into the system in hopes of staving off insolvency in case of another economic downturn. But the parties are far apart on how to accomplish that.

In 1980, the fund’s target level was set at $750 million, with the incentive that payroll taxes would automatically decrease and benefits for dependents of the unemployed would see a slight bump when the fund exceeded that target. The figure wasn’t adjusted until 2006, and it’s been stuck at $1 billion since then.

Adjusted for inflation, the original $750 million would be about $2.6 billion in 2022 dollars. But that number is likely way out of reach for current negotiations.

Asked Wednesday night where he would peg a new target number for the fund, Hoffman couldn’t name an exact figure, but said it was unlikely Illinois could borrow enough to get to true “solvency.”

“I think you would want to borrow a little bit more than what the deficit is just because you have to plan for a downturn,” Hoffman told NPR Illinois. “We did that before. But I think you have to just put a [new] solvency number into statute and work towards it over time.”

Republicans are in no mood to vote for any sort of tax hike during an election year. GOP leaders are sensitive to pushback from loud conservative voices — including factions in their own caucuses — who continue to target a group of GOP lawmakers for voting with Democrats to double the state’s motor fuel tax in 2019 in order to help fund a massive infrastructure plan via the MFT’s first increase in 30 years.

Similarly, business leaders balk at the notion of increasing costs on employers after so many were brutalized or defeated by the pandemic and accompanying recession, followed by difficulties hiring and keeping workers, supply chain shortages and most recently, a sustained rise in inflation.

Together, Republicans and business leaders have pushed hard on the narrative that not using every possible dollar of Illinois’ unspent ARPA funds to stabilize the unemployment fund is malpractice. House GOP members turned up their heated rhetoric on Wednesday night,

“They want to cut your benefits,” State Rep. Deanne Mazzochi (R-Elmhurst) said of Democrats during debate on the bill. “So we're going to keep billions in debt, cut benefits and raise taxes. More failure.”

Democrats were offended by Republicans’ assertions that the majority party would relish cutting unemployment benefits or raising payroll taxes, but were even more agitated by GOP members resurfacing complaints that ARPA money included in this year’s state budget had been allocated to “pet projects” in Democratic districts, a claim top budget negotiators in the majority party didn’t deny in a Chicago Tribune review of those projects last summer.

House Majority Leader Greg Harris (D-Chicago) instead pointed to the state’s use of both ARPA funding and previous COVID stimulus money to support healthcare providers during the pandemic.

“If you're standing there and saying that we should have shorted our hospitals, we should have shorted in our clinics, we should have shorted the nursing homes, we shouldn’t have bought the [personal protective equipment], we shouldn't have bought the vaccines, that we should have let people suffer, that we should not have made sure that frontline workers were getting paid,” Harris said, addressing Republicans during debate. “I’m proud that we spent that money to be sure that these Illinois are protected. And the fact that you want to take it away from them, you think we should have shorted them — shame on you.”

Republicans on Wednesday echoed a request made in a letter to Gov. JB Pritzker this week, urging Democratic leaders to claw back ARPA money that hasn’t yet been spent, and redirect it paying to unemployment insurance debt, claiming $6.94 billion in ARPA funds are unspent and should be up for grabs. Pritzker’s office, however, says the true amount of federal funding still left is $3.5 — and that was before the House’s vote, which would shrink that number down to approximately $800 million.

But Pritzker, Hoffman and other Democrats defended the $2.7 as a greater percentage of ARPA funding than nearly any other state had dedicated to paying off unemployment insurance debt.

A previous version of this story erroneously said no member of the business community made a public statement after Wednesday night's vote.

Hannah covers state government and politics for Capitol News Illinois. She's been dedicated to the statehouse beat since interning at NPR Illinois in 2014, with subsequent stops at WILL-AM/FM, Law360, Capitol Fax and The Daily Line before returning to NPR Illinois in 2020 and moving to CNI in 2023.