Illinois has just become the 16th state forced to borrow money from the federal government to pay unemployment insurance benefits because its trust fund has run dry.

The roughly $34.7 million Illinois has borrowed so far pales in comparison to the unemployment insurance debt of states like neighboring Michigan, which has borrowed $2.2 billion so far.

But since Illinois, like many states, received most of its unemployment insurance revenue in the first two quarters of the year, the borrowing has probably only just begun.

“The borrowing is a result of the national economic challenge,” a state workforce department spokesman told Crain’s Chicago Business.

Au contraire.

Going into the recession, Illinois had a dangerously low level of reserves, a situation that’s gone on for years. Indeed, Illinois was forced to borrow federal money in 2005, relatively good economic times.

To make matters worse, the tax rate on employers was not high enough to sustain benefits paid, let alone to accumulate a safe level of reserves to prepare it for a recession—even one much milder than the current train wreck. The red line is what the Department of Labor estimated a sustainable tax rate to be. The yellow line is the average tax rate Illinois employers paid.

As we detailed in our series on unemployment insurance with public radio’s Marketplace, the Land of Lincoln is not alone. Many other states underfunded their systems in good years and are now forced to borrow just to keep benefits checks in the mail.

States have until 2011 to pay back the loans, but without significant increases in taxes or benefit cuts, many states will be unable to do so. After that, Uncle Sam starts charging interest, which must be paid out of a state’s general fund.

Illinois is due a temporary boost of about $300 million in stimulus money as a reward for expanding unemployment insurance eligibility. But given that the state paid out about $1.8 billion in benefits in 2008, when the state’s unemployment rate was a paltry 6.5 percent (it is now over 10 percent), the stimulus funds are not likely to fend off more borrowing.

As part of our series last month, we did an interactive feature detailing the health of states’ unemployment systems. One state we warned was on the brink: Illinois. 

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