Illinois’ federal unemployment loan payoff forgoes borrowing, benefit cuts

Illinois will pay off the remaining balance on its $4.5 billion federal unemployment insurance trust loan with its own surplus revenues under a deal struck with labor and business that averts steep employer premium increases, benefit cuts and borrowing.

Gov. J.B. Pritzker earlier this year began chipping away at the loan, which was taken out to manage the flood of claims that followed the state’s shutdown to manage rising COVID-19 cases in the spring of 2020. The state directed $2.7 billion of its $8 billion of federal American Rescue Plan Act relief toward the loan.

Labor, business, administration and legislative negotiators continued debating how to fully wipe out the loan through an agreed bill process before triggering an automatic hike in payroll taxes.

Benefit cuts, higher employer premiums, and unemployment bonds were all on the table. With negotiations still ongoing, Pritzker in September said the trust had sufficient funds to pay down another $450 million of the loan.

The agreement announced Tuesday will “eliminate the pandemic-induced UI trust fund debt, replenish the fund for the future, protect benefits for working families and further fuel Illinois’ strong economic trajectory,” Pritzker said at a news conference. “The resolution of this matter alleviates a burden looming over the heads of workers and businesses alike.”

The state will provide $1.8 billion of funds to pay a remaining $1.36 billion balance and provide a $450 million cushion for future claims. The $450 million is a loan to the fund that will be repaid by the trust interest-free over 10 years. The state will direct repayment to its rainy day fund.

The plan will save $20 million in interest that would have been accrued over the next year and averts the need to raise about $900 million in payroll taxes over the next five years.

The payoff is part of a larger legislative package that includes structural reforms to the unemployment system negotiators say will help stabilize the fund going forward during times of elevated claims with an increase in the portion of an employee’s pay that employers are taxed.

The plan also received support from Republican lawmakers who had long called on the Democratic governor and legislative majority to use more of the state’s ARPA relief to repay the federal loan. Lawmakers are expected to vote on at least part of the plan during the final days of their annual veto session this week.

Pritzker portrayed the payoff as another stride in stabilizing the state’s finances. The state’s latest efforts this year were rewarded with a round of rating upgrades that lifted the state to the Baa1/BBB-plus level. That’s two notches above where they were at the start of the pandemic, but they remain the lowest among states and the average, which is in the double-A category.

Pritzker signaled his intent to put more state funds toward repayment of the loan in mid-November after the Governor’s Office of Management and Budget published its annual Economic and Fiscal Policy Report.

The state raised its revenue estimates for the current fiscal year that runs through June 30 by $3.69 billion due to the healthier pace of income and sales tax collections so far as well as other one-time revenue streams.

Pritzker at the time did not say just how much of the surplus would go toward the remaining trust loan balance.

The state intends to put $1.3 billion of the surplus into its once-barren budget stabilization fund that has received an infusion of $1 billion over the last year, bringing the fund to about 5% of state sourced general fund revenues, and further pay down some bills.

The state also intends to pay off a portion of the outstanding $561 million balance from its $1.5 billion tobacco bond issue through a cash defeasance tapping funds received by Attorney General Kwame Raoul’s office that settled claims over payment amounts with the tobacco companies. The freed-up stream of tobacco settlement payments would go to support Medicaid costs.

The fiscal 2023 budget originally anticipated an ending balance of $132 million, but so far this year income and sales tax collections are up $1.47 billion.

A larger-than-forecast fiscal 2022 balance in the income tax refund account also led to a one-time transfer this year of $1.28 billion.

Increased expenses will eat away at $832 million of surplus with the remainder going toward Pritzker’s various proposals, including the rainy day fund and repaying the trust fund loan.

The non-partisan Commission on Government Forecasting and Accountability recently released its own forecast that offers a slightly rosier assessment with a revised revenue forecast up $4.9 billion. That’s $1.2 billion over the governor’s office and is due mostly to a $1 billion differential in personal income tax collections expected.

“Strong gains in revenues for first third of the fiscal year necessitate an increase in the FY 2023 revenue outlook,” the COGFA report reads. “However, a conservative outlook for the remaining two-thirds of FY 2023 will be assumed at this time because of the” the potential resurgence of COVID, an unstable geopolitical environment, inflation and recessionary risks.

To manage skyrocketing unemployment claims in the early months of the pandemic, 22 states in 2020 took what’s known as Title XII advances allowed under the Social Security Act. It’s an automatic loan mechanism to ensure that unemployment benefits continue without interruption. The federal government reported that 18 of those states had an outstanding balance on January 1, 2021, totaling $45.5 billion.

Many states were able to supplement their unemployment funds during the year by using relief funds available through the 2020 Coronavirus Aid, Relief and Economic Security, or CARES, Act and many have tapped their ARPA relief to repay a portion of loan balances. Interest was initially waived but is now accruing at a rate of 1.59%.

As of Nov. 28, only a handful had outstanding balances besides Illinois, with California owing $18 billion, New York owing $7.7 billion, Connecticut owing $74.5 million and the U.S. Virgin Islands owing $95.7 million, according to the U.S. Treasury.

Illinois sold $1.5 billion of bonds in 2012 to repay an earlier federal unemployment loan. The Illinois Department of Employment Security issued the unemployment insurance fund building-receipts revenue bonds.