ANALYSIS: Nov. 10 federal deadline looms over Unemployment Insurance Trust Fund debate

[March 26, 2022]  By JERRY NOWICKI
Capitol News Illinois
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The Unemployment Insurance Trust Fund was the talk of the Capitol this week.

Democratic lawmakers voted to dedicate $2.7 billion toward filling a $4.5 billion pandemic-driven hole in the fund which pays the unemployment claims of laid off Illinoisans. Gov. JB Pritzker signed the bill Friday.

The reaction was unsurprisingly partisan. Republicans called it a back-door tax hike, while Democrats said it was a necessary, realistic measure to reduce the mammoth trust fund debt and keep negotiations on further reductions from running off the rails.

Strictly speaking, the Democrats’ action this week was simply a cash infusion into the fund. It used most of the remaining federal dollars from President Joe Biden’s American Rescue Plan Act to cut the deficit to $1.8 billion.

It didn’t touch employer tax rates or unemployment benefits.

But it also didn’t address the whole debt. That’s an action that Republicans had been urging for nearly a year while Democrats waited in vain for further, targeted federal support for unemployment trust funds nationwide. It didn’t come, and by the time the state acted this week, it had already appropriated all but $3.5 billion of its ARPA funds.

And so it came to be that the partial debt paydown went ahead this week with only Democratic support nearly a full year after Republicans first started sounding alarms on the issue.

Partisan politics aside, there’s truth to the Republican argument that the decision to allot $2.7 billion will have consequences that could include benefit reductions for people claiming unemployment and insurance premium increases for employers.
 

The exact extent of those consequences, however, is not yet known. Business and labor remain at the negotiating table in what Illinois lawmakers refer to as the “agreed bill” process.

That means both sides must determine an acceptable level of benefit cuts and rate hikes to dig the state out of the remaining $1.8 billion hole.

And lead Democrats in the negotiations made clear this week that going to the private bond market is another option at the table.

“There have in the past been shared sacrifice from business and labor,” Rep. Jay Hoffman, D-Swansea, said in a news conference in the governor’s office Thursday after the bill passed. “But remember this: When you talk about agreed bill process, that's just what it is. If labor doesn't agree … to some type of share in paying for the bonds, if they don't agree to doing that, we don't have a bill.”

When considering what’s going to happen next, there are number of important deadlines to consider.

For starters, if lawmakers didn’t act in time for ARPA payments to be made to the fund by April 1, they would have lost the ability to decrease unemployment benefits until 2025. They hurried to act by that date, likely signifying that benefit cuts are on the table despite strong Democratic rhetoric against such an action throughout the pandemic.

There are at least two other looming deadlines to note, one of which is more “real” than the other.

The first is July 3, when a number of “speed bumps” are set to take effect.

What’s a “speed bump?” It’s legislative speak for about $500 million each in benefit reductions and employer premium increases that lawmakers write into law routinely to encourage business and labor to come to the negotiating table in times like these.

Operationally, that amounts to a reduction to the wage replacement from 47 percent to 42.4 percent for unemployed workers, and a reduction to the benefit period from 26 to 24 weeks.
 

The rates at which businesses pay into Illinois’ trust fund are determined by a complex statutory formula based on unemployment rates, the number of layoffs at a business, the number of employees and other factors.

But under the so-called speed bumps, employers would see their “adjusted state experience factor,” which determines their insurance premiums, increase by 16 points above what it would otherwise be, and an additional surcharge of 0.325 percent would be added to the employer tax rates.

It’s important to note that the speed bumps rarely take effect – business, labor and lawmakers from both parties agree that changes of that magnitude would be catastrophic. But, because it’s written into law, all parties know they better get serious about negotiations before that date.
 

But even July 3 is a flexible deadline. Lawmakers need only erase the date and write in a new one. It’s what they did in the fall veto session to push it back from January to July.

The deadline that’s going to be more important for forcing action on this matter is a federal one – Nov. 10.

That pertains to the Federal Unemployment Tax Act, or FUTA, and what is called the FUTA credit.

Federal law requires an employer to pay the FUTA tax on an employee’s first $7,000 of wages at a rate of 6 percent. But it also offers businesses a 5.4 percent tax credit, putting the effective rate at 0.6 percent.

If a state has a negative balance in the trust fund on Jan. 1 for two consecutive years – as Illinois does – it has until Nov. 10 of the second year to retire that deficit, or the federal government will start clawing back 0.3 percent of the FUTA tax credit from employers each year until the deficit is gone.

So that means the effective FUTA tax rate would increase from 0.6 percent to 0.9 percent and on and on each year until it hits the full 6 percent or the debt is gone. That’s an increase of $21 in federal taxes per employee per each 0.3 percent rate hike, the first of which would apply in tax year 2022. Further reductions could take effect if the debt is outstanding for three years and again at five years.

And that leads back to the “agreed bill” negotiations between business and labor.

Benefit cuts, tax hikes and private bonds are all reportedly on the table as lawmakers look to act before the FUTA changes take effect. Another reason to act is that interest is accruing at a rate of 1.59 percent, and the $41 million owed by Illinois as interest currently could reach $80 million by November.

In 2011, following the Great Recession, Illinois went to the private bond market, swapping its federal interest rates for a lower rate from private investors. It dedicated a portion of the revenues from increased premiums to pay down that debt, and it took less than the 10-year life on the bonds to retire them.

Business and labor sources I’ve spoken to previously on this issue declined to speak publicly on it this week because they don’t want to get in the way of the closed-door negotiations. I suppose that’s a good sign, even if the talks have had their share of rough patches in recent days.
 

It’s also a good sign that some of the state’s major employer trade groups called the measure a “positive step.”

“Today’s vote will inject $2.7 billion from the American Rescue Plan (ARPA) into the Illinois Unemployment Insurance Trust Fund,” a group of business organizations said in a statement. “Illinois employers appreciate the governor and members of the General Assembly for taking this positive step in addressing the massive $4.5 billion in outstanding debt. We’re hopeful that negotiations will continue to resolve the remaining balance of this unprecedented deficit.”

Labor, however, declined to issue a statement on the matter.

In a Wednesday news conference, Hoffman said he was hopeful the “agreed bill” process would conclude in the next three weeks. But lawmakers are deadline driven, so I suppose it’s possible they’ll be back in town this summer as they lumber toward the July speed bumps.

Jerry Nowicki is the bureau Chief of Capitol News Illinois, a nonprofit, nonpartisan news service covering state government that is distributed to more than 400 newspapers statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.