“Time bomb” ticking in state budget

Monday, September 27, 2010

SPRINGFIELD — Illinois’ nightmarish budget situation could get even scarier 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 pay unemployment benefits to laid-off workers.

And now, the bill for that borrowing — an estimated $250 million in interest — is about to come due, according to information compiled as part of a joint project of Illinois Issues magazine and Herald & Review’s Springfield Bureau.

An expanded version of this report will appear in the November edition of Illinois Issues magazine.

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.

Throughout the country, states manage Unemployment Insurance Trust Funds to pay benefits to workers who lose their jobs. Illinois’ 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. 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.

At the beginning of 2009, the state had a healthy $1.5 billion saved up, but the surge of bad economic news and layoffs helped bring the balance of the fund down to $100 million by July of that year. 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.

Most agree the lingering economic problems have caused the meltdown. 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,” said 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.

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 as much as $250 million in interest payments — at a time when the state is already in dire fiscal shape.

David Vite, executive director of the Illinois Retail Merchants Association, 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 said.

Wentworth agrees that the extent of the recession was not expected. Nearly half of those who have used the unemployment 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.

“Ultimately, it will be business and labor working together,” Denzler says. “The process works pretty well.”
Sean Stott, a representative of the Laborers’ International union, said he doesn’t see negotiations between business and labor getting serious until after the federal government outlines how far it will go in helping the states.

“A lot depends on what action Congress takes,” Stott said.