Financing Unemployment Insurance in Illinois
May, 2003
By National Employment Law Project

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Executive Summary
In this briefing paper, NELP shows that the current unemployment insurance (UI) solvency crisis in Illinois is due to imprudent decisions made in the 1980s and ignored since that time. At that time, Illinois adopted a "pay as you go" UI financing regime. As a result, Illinois has had one of the most insolvent UI programs in the nation for fifteen years.  Structural flaws in pay as you go financing, not a relatively mild recession, have produced the current UI solvency crisis facing the state. With federal borrowing to ensure continued payments of UI benefits predicted this year, these flaws in Illinois' UI financing structure should come to broader attention so they can be properly addressed.

Returning to a policy of forward funding of UI is an essential step to restoring sound UI financing and avoiding future UI trust fund solvency crises in Illinois. The solvency crisis of 2003 is an opportunity to act to limit federal borrowing in coming years and take steps to reach financial self-sufficiency before the next economic downturn. Restoring UI financial solvency as soon as feasible means that federal interest on loans and tax surcharges to repay federal loans can be limited or avoided over time. In addition, returning to forward funding (sometimes referred to as a rainy day fund) will take better advantage of federal interest payments as a means of paying for UI benefits in contrast with the current policy's extensive reliance on employer tax contributions.

What are the impacts of the current state policy of keeping Illinois UI trust fund levels low? First, the Illinois Department of Employment Security projects that Illinois will borrow funds from the federal government in 2003 and for coming years to maintain state UI benefit payments. Second, UI solvency taxes as well as federal interest payments are a real possibility in subsequent years to repay these loans. Third, state UI payroll tax increases are going to occur automatically under our current law despite the state's continuing economic woes. And, finally, UI benefit restrictions are being urged by some despite predicted high jobless rates for the foreseeable future. 

With its current UI solvency crisis, Illinois faces unpleasant options. Any search for solutions should be informed by an understanding of the factors contributing to the crisis, the policy options available to address the crisis, and the advantages and disadvantages built into those competing options.