August 18, 2022
FOR IMMEDIATE RELEASE
Contact: Kyle Peebles
kpeeb2@uillinois.edu
(217) 333-5102
New report from the Institute of Government and Public Affairs shows potential reasons why the unemployment trust fund in Illinois has a large deficit.
URBANA – A new analysis explores the connection between Illinois’ high unemployment rate, market disruption brought on by the COVID-19 pandemic, and the consequences for Illinois’ unemployment trust fund.
The Policy Spotlight from the University of Illinois System’s Institute of Government and Public Affairs (IGPA), titled “Why does Illinois’ Unemployment Insurance Trust Fund have a large deficit?,” discusses the Unemployment Insurance (UI) system and how the economic disruption brought on by COVID-19 and other policy factors led to Illinois having one of the largest UI deficits in the nation. The trust fund provides income support to eligible people who have lost their jobs through no fault of their own. The system automatically provides economic stimulus when the unemployment rate increases during economic downturns. This report explores reasons why the trust fund has a high deficit.
“Illinois’ unemployment rate has usually been higher than the national average since the 1970s,” said David Merriman, a co-author of the Policy Spotlight and the James J. Stukel Presidential Professor of Public Administration in the College of Urban Planning and Public Affairs at the University of Illinois Chicago. “After the COVID-19-induced economic recession, the discrepancy between Illinois’ unemployment rate and the national average grew larger.”
Due to layoffs resulting from the pandemic and economic disruption, UI benefit payments quickly decreased Illinois’ UI trust fund balance. To continue paying the benefits, Illinois borrowed more than $4.5 billion from the federal government. Illinois had the third-highest outstanding federal debt among U.S. states at the end of both 2020 and 2021. In response to the pandemic and the associated economic downturn, the federal government provided temporary fiscal relief to states through the Coronavirus Aid, Relief, and Economic Security Act (CARES) and American Rescue Plan Act of 2021 (ARPA). Many states allocated some of these federal funds to pay down their trust fund deficits soon after CARES and ARPA were passed. Illinois did not use federal funds to support its UI program until March 25, 2022, when Gov. J.B. Pritzker signed a bill dedicating $2.7 billion of the state’s $8.1 billion ARPA funds to its UI fund.
Although statewide stay-at-home orders and other COVID-mitigation policies contributed to the large deficit, other factors that can be controlled by the Illinois Legislature had a significant impact as well. Illinois implements a pay-as-you-go system for financing the UI trust fund. The system has allowed employer tax rates to fall during economic booms and the taxable wage base to grow much more slowly than total wages. As a result, trust fund balances have not been adequate to pay benefits when unemployment rates rise rapidly.
Illinois’ pay-as-you-go financing practices have resulted in low trust fund balances, prevented the accumulation of additional reserves during good years, and increased the likelihood of deficits during economic downturns,” said Merriman, who co-leads IGPA’s Fiscal and Economic Working Group. “While dramatic increases in the unemployment rate brought about by a pandemic may be beyond state policymakers’ control, some actions could be taken to diminish the chances of large future UI trust fund deficits.”
Illinois policymakers should thoroughly evaluate the flow of revenues into the UI trust fund and payouts from the fund, especially during the pandemic, the IGPA analysis recommends. Further, they should determine the reasons for and extent of declines in revenues, and similarly, the reasons for and extent of increases in benefit payouts.
Illinois also should formally evaluate the benefits and costs of replacing its pay-as-you-go UI funding system with a forward-funding approach. Such an approach would require higher employer taxes during economic booms but would allow tax-rate stability or even tax cuts during economic downturns. Illinois still has federal relief funds, and these funds could be used to pay the UI debt accumulated in the past or be spent on current investments to make up for earlier deficits. The first option may largely benefit employers by avoiding increased federal payroll taxes. The second potentially distributes future benefits to more people in the form of better infrastructure or services. |
