By: Mark Glennon*
To cover its share of exploding cost of unemployment benefits, the State of Illinois has borrowed $2.6 billion from the federal government to prop up its unemployment insurance fund. That’s separate and apart from loans by the Federal Reserve Bank to the state for other purposes that we recently wrote about, which will increase to $3.2 billion when Illinois completes a recently announced addition to its Fed loans.
Unemployment funds in most states are under stress, but Illinois’ is among a few in particularly tough shape, as reported last week by Bloomberg. “A handful of states account for the bulk” of the Treasury borrowing by unemployment funds, which now total $40 billion according to Bloomberg. Through Nov. 9, California has borrowed $15.8 billion, New York $8.4 billion, Texas $5.3 billion, and Illinois $2.6 billion, Bloomberg reported.
Loans by the federal government to state unemployment funds are a bit complex. The system is intended to have states run up a surplus in good times then draw it down during recessions, sometimes with the help of loans from the Treasury. Those loans from the Treasury therefore are not unusual, though they are exceptionally large now.
Repayment is required in about two years. However, if a state doesn’t or can’t pay Treasury back the loan, the state can instead adjust benefits downward or essentially charge more to employers who pay the premiums on unemployment insurance.
The bottom line is that one way or another state residents pay back the loan, whether through taxes paid to cover the repayment by the state, lower benefits to the unemployed or higher cost to employers.
Many states, including Illinois, didn’t run up surpluses before the pandemic when the economy was hot, as the system is intended to work. That’s shown in the U.S. Department of Labor’s annual report issued in February, just before the pandemic set in.
The 22 states that were below recommended standards as we went into the current recession are at the bottom of the ranking below. Illinois is forth from the bottom.
The wild card in how this will sort out is what, if any, pandemic relief package Congress will authorize for states. That will depend heavily on the Georgia election in January which will determine who controls the Senate. If Democrats win, it’s widely expected that Congress will authorize a very generous federal relief package. That package may or may not specifically include direct help for unemployment funds, but money is fungible and the worst-off states like Illinois are hoping for broad relief.
And the ultimate size of the problem remains unknown. For last month, Illinois reported the largest increase in initial unemployment claims of all states, so stay tuned.
*Mark Glennon is founder of Wirepoints.