If Illinois uses COVID-19 funds for operations, expect financial pitfall

A think tank advised Illinois leaders not to use temporary federal COVID-19 relief aid for on-going programs. It would lead to future funding shortfalls.

Illinois could be facing a financial cliff when federal taxpayer COVID-19 aid expires if the state launches new, ongoing programs using temporary relief funds, warns a non-partisan think tank.

States such as Illinois that increased annual spending while relying on surplus American Rescue Plan funds could soon see unsustainable shortfalls once that relief expires, said the senior officer for state fiscal health at The Pew Charitable Trusts, Josh Goodman.

Goodman points to the post-Great Recession era when states placed an overreliance on American Reinvestment and Recovery Act aid to prop up spending. Many states were unable to fund ongoing programs and services when that federal relief ran out.

States that act responsibly with the temporary funds currently in their hands could instead put their economies on a more competitive footing in the future, he said.

“What we are counseling states is that they need to still be mindful of the long-term picture,” Goodman said.

Goodman cautioned Illinois elected leaders against using temporary federal dollars to create new, ongoing programs – such as the universal basic income program being piloted in Chicago. He said if state revenues are lagging expenses, using the funds would be reasonable to pay for existing obligations.

One suggestion was to refill the state’s rainy-day fund used to maintain programs and retain workers without major tax increases or spending cuts at the start of an economic downturn. Illinois’ rainy-day fund had just $60,000 in it at the start of the COVID-19 pandemic, enough to cover state operating expenses for 30 seconds.

This underfunding is primarily why Illinois was the only state in the nation to borrow from the Federal Reserve lending program, taking on $1.8 billion in debt at the onset of the pandemic.

Illinois’ unemployment insurance trust fund also remains $5.8 billion underwater after the state borrowed $4.2 billion in initially interest-free federal loans. But a failure to repay that loan on time now has Illinoisans on the hook for $60 million a year in interest.

“Putting some money in the rainy-day fund would be a way to save some of the money the state has in the surplus right now for future expenses in years that are more challenging,” Goodman said.

Experts at the Illinois Policy Institute advise using the relief funds to replenish the unemployment trust fund. Besides the $60 million a year in interest on money borrowed for the fund, Illinois risks automatic unemployment insurance tax hikes on businesses that current law mandates until the trust fund is refilled. Those hikes will slow jobs recovery in a state already lagging the nation’s economic recovery.

Gov. J.B. Pritzker said state leaders have not dedicated any COVID-19 funds to recurring programs in the fiscal year 2023 state budget. The governor is expected to provide specifics on the use of these federal funds during his state budget proposal Feb. 2.