Illinois among worst-prepared in nation to weather next recession

Illinois among worst-prepared in nation to weather next recession

Illinois lawmakers and Gov. J.B. Pritzker reached a deal to pay off $1.8 billion borrowed from the federal government for unemployment benefits during the COVID-19 pandemic. It’s a positive step, but the state remains ill-prepared for the next economic shock.

Illinois Gov. J.B. Pritzker and a bipartisan group of lawmakers came to an agreement on paying off the remaining deficit in the state’s Unemployment Insurance Trust Fund.

The remaining $1.8 billion hole will be filled by a $1.36 billion payment from excess tax revenues this year, while the remaining $450 million will come from an “interest-free loan” to the fund that is to be paid back during the next 10 years, according to a press release. As that money is paid back to the state through business taxes for unemployment insurance, it is to be directed into the state’s budget stabilization fund, also known as the rainy-day fund.

The money comes mostly from better-than-expected sales and income tax revenues and one-time revenues from federal pandemic relief funds. Those revenues boosted the projection for the state’s finances to a $1.7 billion surplus for this fiscal year. Business advocates backed the deal even though it raises taxes on businesses because the increase is less than what it otherwise would have been without an agreement.

Illinois Retail Merchants Association President and CEO Rob Karr praised the agreement and said the deal “means Illinois employers will face at least $900 million less in taxes over five years than they would have otherwise.” The $900 million would have been in penalties and interest involved in failing to repay the funds.

The savings Karr mentioned happen because the deal increases the amount of wages taxed for unemployment insurance. According to Crain’s Chicago Business, “The taxable wage base will rise 2.4% a year for each of the next five years, going from $12,960 a year to $14,592. The figure had not risen since 2019, and under this deal it will remain at the new negotiated level indefinitely.”

However, these tax hikes could have been avoided entirely had the state used pandemic-related relief funds from the federal government to pay off the balance as lawmakers in other states did. Instead, Illinois missed multiple deadlines to repay the loans in 2021 and 2022, costing taxpayers millions in interest. Lawmakers partially paid down the deficit in March with $2.7 billion in federal funds that included $60 million in interest because of missed payments.

Despite the support of business groups, the deal still represents a tax hike for Illinois businesses at a time of great uncertainty for the state’s economy. The state’s unemployment rate is currently the second highest in the nation. Economists continue to express concerns about the potential of a forthcoming recession and the possibility that actions taken by the Federal Reserve to combat inflation may end up pushing the market into recession. The Fed continues to hike interest rates to quell inflation that remains high at 7.1%. After recently hiking rates by 75 basis points four times, the Fed raised rates by 50 basis points in December, with rates reaching their highest level in 15 years.

An economic downturn would affect the state’s finances as much as its businesses. Recent increased contributions to the state’s rainy-day fund and planned future contributions to bring the fund to over $3 billion represent the most serious attempt by the state to actually build up reserves to prepare for a downturn after years of maintaining a basically empty fund.

According to historical data from the National Association of State Budget Officers, Illinois’ rainy-day fund has been severely lacking compared to most other states.

From fiscal year 2018-2023, the average monetary balance for Illinois’ rainy-day fund ranked 44th in the nation, with an average balance of just $236 million. As a percentage of the state’s general fund spending, Illinois ranked last over that same time, averaging just 0.5% of the state’s general fund spending.

The Government Finance Officers Association recommends maintaining reserves adequate to cover “no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” Illinois Comptroller Susana Mendoza recently told the City Club of Chicago she would like the rainy day fund to be 7.5% of the state’s budget, about $3.25 billion. That would be well below the two-month recommendation.

According to data from The Pew Charitable Trusts, Illinois’ current reserves would allow the state to operate for about 12 days, the fewest of any state. By contrast, Wyoming could operate for nearly a full year on its reserves.

Should a recession strike, Illinois remains more vulnerable to the harms of a downturn than other states, despite Pritzker’s rosy assessment of Illinois’ fiscal condition. The state’s economy still hasn’t fully recovered from the pandemic economic downturn. Making matters worse, Illinoisans suffered more and for longer during the Great Recession than most other Americans and are poised to be particularly vulnerable in the event of an economic downturn today.

Despite financial gains from better-than-expected revenues, abnormally high pension fund investment returns and one-time federal aid leading to more optimism about the state’s fiscal future, Illinois remains poorly positioned to handle another economic drop.

A recent stress test conducted by Moody’s Investors Service found most states are well prepared to financially persevere through a recession. Illinois is not one of those states. The report found Illinois to be among the least prepared to handle even a moderate recession.

Without serious structural reforms to state spending, public pensions and the state’s tax system, Illinois will likely remain more vulnerable to the adverse effects of economic downturns than other states. The consequence of that vulnerability will mean forcing residents and businesses to pay the price for Springfield’s financial mismanagement through higher taxes, job losses and business closures.

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