Federal Covid-19 Relief Going to Illinois Debt Rather than Business Relief Senior Director of Budget & Tax Research Adam Schuster Pritzker borrowed during the pandemic rather than making responsible budget decisions. So Illinois’ federal relief must repay debt rather than helping businesses recover like other states. The U.S. Treasury Department on May 10 issued guidance derailing Illinois Gov. J.B. Pritzker’s plan to use federal financial help to pay down debt issued to cover budget deficits during the pandemic. Pritzker and state Comptroller Susana Mendoza now say they plan to use higher than expected state revenues to pay off the debt. But money is fluid, so he is essentially taking money from one pot rather than another. The practical effect is exactly the same as if the state had used federal aid to pay down the debt. Treasury will send Illinois a total of $8.1 billion for state government, $2.7 billion for metropolitan cities including $1.9 billion for Chicago, $2.5 billion for counties, and $742 million for smaller cities. The interim final rule released by Treasury “precludes the use of [Fiscal Recovery Funds] to cover the cost of debt incurred prior to March 3, 2021.” Initially, Pritzker and Mendoza indicated they would seek changes to the rule to allow their original plans to move forward, saying it was the most fiscally responsible use of the funds. Federal borrowing should not have been necessary Illinois was the only state to rely on emergency borrowing from the Federal Reserve to shore up its budget during the pandemic. Pritzker borrowed $1.2 billion in June 2020 with a 3.83% interest rate and a one-year repayment term. After voters rejected Pritzker’s proposed progressive income tax hike in November, he secured another $2 billion loan with a 3.42% interest rate to be repaid over three years. Mendoza told Treasury that Illinois’ borrowing “was essential for the continued performance of government services” during the pandemic. Because the state could have balanced the budget with just two fiscally responsible policy changes, pension reform and flat funding, this clearly is not the case. Additionally, 49 other states were able to manage their budgets without borrowing from the Federal Reserve. But Mendoza is right to say using the funds for repaying the debt is “entirely consistent with the spirit of the American Rescue Plan.” Mitigating economic harm from the pandemic, replacing lost government revenues, and supporting the funding of essential services are core purposes of the fiscal recovery funds. Directly or indirectly, repaying short-term borrowing incurred during the pandemic fits each of these purposes. Remaining federal funds should be used to bolster economic recovery Bond Buyer reports Illinois still owes $2.175 billion to the Federal Reserve and $600 million to other state accounts. That would still leave about $5.4 billion in federal funds for other uses. Pritzker in his February budget address endorsed the principle of reserving a share of federal aid for business relief. He has yet to propose specifics and is currently pushing nine tax increases, mostly on businesses, worth at least $932 million. In fact, the most recent update from the governor’s budget office shows he is counting only nearly $1.5 billion in “revenue enhancements,” indicating additional tax hikes could still be on the table. The governor had previously backed a plan to withdraw pandemic tax relief from around 440,000 small businesses. Before considering what type of economic relief Illinois can provide to businesses, a logical first step would be to avoid imposing additional harm. Federal aid and higher revenue projections mean lawmakers should reject all of Pritzker’s proposed tax increases to ensure businesses are in a position to create jobs and grow wages in the postpandemic recovery. Illinois’ 7.1% unemployment rate remains higher than the nation and the Midwest. Additionally, the state should use federal funds to replenish the unemployment trust fund emptied during the pandemic. If it doesn’t, it will have additional federal loans to repay with interest. It also risks automatic unemployment insurance tax hikes on businesses that current law mandates until the trust fund is refilled. . Illinois will need to use much of the aid for debt service, directly or indirectly. Failing to pay off that debt would harm Illinoisans. But that debt only exists because of a fiscally irresponsible budget adopted during the pandemic. Illinois needs significant fiscal reforms to be able to continue providing essential services in the long run at a tax burden that doesn’t ruin its economy. Most important among these is a constitutional amendment to allow true pension reform. A five-year fiscal plan from the Illinois Policy Institute, Illinois Forward, provides lawmakers with a road map to success. Page 18
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