State could face $250 million interest payment

Illinois’ nightmarish budget situation could get even scarier in the not-too-distant future

By Kurt Erickson

Given Illinois' nightmarish budget situation, it should come as little surprise that there is yet another frightening financial monster lurking in the not-too-distant future. Amid the huge backlog of bills and unpaid pension obligations, the state also has borrowed more than $2.2 billion from the federal government to continue paying out unemployment benefits to laid-off workers.

And now, the bill for that borrowing — an estimated $250 million in interest — is about to come due. In the next few months, Illinois and other states will have to figure out how to repay the money to the feds, while also attempting to craft a plan to replenish their depleted unemployment insurance trust funds.

Although Congress and President Obama could come up with a solution to lessen the looming financial blow, business and labor groups — who have the most at stake when it comes to the issue of jobless benefits — aren't figuring on any quick fix.

“It really is the ticking time bomb,” says Mark Denzler, government relations chief for the Illinois Manufacturers Association, which represents large business interests in the Capitol.

“We’re in the red to the feds,” adds Timothy Drea, secretary/treasurer of the Illinois AFL-CIO.

Throughout the country, states manage Unemployment Insurance Trust Funds to pay jobless benefits to workers who lose their jobs. The main goal of the program is to partially replace the wages of workers who've lost their jobs. The idea is to keep communities that are especially hard hit by job losses from unraveling from the effects of joblessness.

The fund is financed by employer contributions, with no infusion of state tax dollars. Businesses pay a percentage of a worker’s salary into the fund at a rate set similarly to life and health insurance premiums. Companies that have a high track record of layoffs may pay more per worker than companies with more stable employment histories. The system is designed to build up the fund in robust economic times so it can provide benefits to unemployed workers in dire financial times.

Illinois’ descent into the borrowing mess didn’t start until July 2009. Before then, the state had a relatively healthy balance in its account. At the beginning of that year, the state had nearly $1.5 billion saved up, but the surge of bad economic news and layoffs helped bring the balance down to $100 million.

By the next month, Illinois was asking for federal help. Over the past year, officials have had to tap the federal line of credit for $2.2 billion. In recent months, things have leveled out a bit. Through the end of August, $414 million was in the account, and the state hadn’t had to borrow since April.

The state, however, may not be able to get through the year without tapping the federal money again.

“I would anticipate that will be the case,” says Greg Rivara, spokesman for the Illinois Department of Employment Security.

It’s not the first time Illinois has had to borrow to keep the benefits flowing. In the economic downturn of the early 1980s, the state found itself more than $2 billion short and sought out a federal loan. What’s not clear is exactly why Illinois' fund ran out of money this time around. Were benefits too high? Was the employer contribution too low? Or, did no one foresee the magnitude of a recession that has left tens of thousands of people without jobs?

Most agree that the lingering economic problems have caused the meltdown.

“We’re not pointing fingers at anyone,” says Drea of the Illinois AFL-CIO. “We’re looking for solutions.”

Illinois’ current system was put in place in what was considered a landmark agreement inked between business and labor in 2003. Those groups say the 2003 agreement resulted in a system that is reasonable in benefits to out-of-work employees and costs to employers.

Labor groups consider Illinois a “good” benefit state, while business groups are not unhappy with the tax structure. Both sides would like to keep it that way as they attempt to work through the potentially painful process of rebuilding the fund.

Nationally, the average annual unemployment tax rate on businesses is about $275 per worker, according to the National Employment Law Project, which advocates on behalf of workers. Based on figures from 2008, the most recent available, Illinois businesses pay about $456 per employee, putting the state seventh in the nation in terms of the amount businesses are paying into the fund.

Those contributions from businesses are then deposited into the state's fund and are used to pay out an average weekly benefit of about $324 to each unemployed worker. That benefit, which initially lasts 26 weeks with varying extensions beyond then, puts Illinois in the top 10 in the nation in terms of benefits.

If nothing else, Illinois can take solace that it isn't alone when it comes to needing a federal boost. Thirty-two states have borrowed nearly $40 billion during the recession. The U.S. Labor Department estimates that by late 2013, as many as 40 states will need to borrow $90 billion to keep the benefits flowing.

By the end of 2010, the projected deficit in Illinois' fund is expected to be $2.75 billion. By some estimates, that could grow to as high as $7 billion by the end of 2012.

“The bleeding is going to go on longer,” says George Wentworth, a senior attorney with the New York-based National Employment Law Project, which studies the issue.

Along with borrowing, Illinois and 34 other states have tried to adjust what they collect from businesses. In some cases, such as Illinois, states raised their taxable wage base, which gives businesses the basis on which to figure how they will pay into the fund for each employee. Illinois' wage base is now $12,520.

For now, the federal government has not required states to repay the loans with interest. But beginning in 2012, Illinois could be on the hook for $250 million to $300 million in interest payments — at a time when the state is already in dire fiscal shape. What's more, the law prohibits states from repaying the interest from unemployment insurance revenue. That means Illinois' next governor could face having to cut popular state services to repay interest.

As a testament to the severity of the problem, a rare coalition of representatives of Illinois-based business and labor groups traveled to Washington, D.C., earlier this year to lobby for an extension of the federal waiver on interest payments.

In the day-long surge, the group met with U.S. Sen. Dick Durbin and a handful of members of Illinois’ congressional delegation, outlining the problems facing the state.

“We wanted to let them know there is a problem,” says David Vite, executive director of the Illinois Retail Merchants Association.

Sean Stott, a representative of the Laborers’ International union who was along for the trip, says the meetings were “remarkable” in that the two usually confrontational groups were on the same page.

“It was very much a team effort,” Stott says.

Vite is among those who believe Illinois' depleted fund could have withstood a traditional slowdown. But the built-in protections were not strong enough to keep the fund from collapsing as the recession has dragged on. “The floor dropped out. It was a once-in-a-century kind of problem,” he says.

“Nobody foresaw the severity of this recession,” adds Drea, who joined Vite on the mission to Washington. “I think Illinois has been responsible."

Wentworth agrees that the extent of the recession was not expected. Nearly half of those who have used the benefits have exceeded the initial 26-week window for benefits. The last time Illinois depleted its fund — in the recession of the 1980s — just a quarter of out-of-work Americans were considered long-term.

A multi-tiered solution could be in the offing. Along with pushing Washington, D.C., to waive or delay interest payments, the Illinois legislature could begin talks aimed at boosting how much employers contribute or lowering how much workers receive in benefits — or some combination of both.

The state isn't putting too much hope that the interest will be waived. “I just don’t how realistic that is,” Rivara says. So that leaves negotiations between business and labor as the main hope.

It's not hard to imagine that the talks could get intense. Labor groups oppose cutting benefits, while companies oppose higher taxes. And both have strong presences in Springfield.

Just as in 2003, both sides say they'll need to reach a compromise.

“Ultimately, it will be business and labor working together,” Denzler says. “The process works pretty well.”

“We can’t be cutting benefits in order to bail out this problem,” Drea says. “We’re not going to balance this problem on the backs of working people.”

While both business and labor say the likely outcome is a trade-off in which businesses pay a little more and benefits are reduced, Wentworth says that’s not necessarily a good thing. “It’s not necessarily logical that the sacrifice be equal,” Wentworth says.

For example, if Illinois were to cut benefits to the absolute minimum federal level, that might only save $1 billion. To make up the remaining billion dollars, employers might have to pay higher taxes.

One potential solution is to tie the wage base, which is used to calculate how much employers pay, to the rate of inflation. That way, the fund grows in relation to wage growth and is spread among a larger pool of workers. Of the 16 states that use that  method, 11 have remained solvent in the face of the lingering economic downturn.

Illinois’ wage base is $12,520. Wentworth suggests that a more realistic base would be about half of Illinois’ median wage, which is about $46,000 annually. But, more than doubling the wage base will be a tough sell to the business community.

“You don’t want to set it too high that it stifles job creation,” Vite says.

Wentworth says he hopes business and labor groups — as well as state and federal lawmakers — take their time to study the issue, rather than politicize it. “It’s not a simple problem,” he says.

Stott says he doesn’t see negotiations between business and labor getting serious until the federal government outlines how far it will go in helping out the states.

“A lot depends on what action Congress takes.”

Kurt Erickson is the Springfield bureau chief for Lee Enterprises.

Illinois Issues, November 2010