Teachers and other employees have worked hard for their pensions, and they earned their benefits. CPS’ priority is to protect their pensions while at the same time continuing to protect the gains that students are making in the classroom, and preserve the District’s investments in schools.
For many years, pensions have been the single largest driver of CPS’s structural deficit. Unlike other school districts in the state, CPS is required to fund its own teacher pension system with virtually no state support. Other districts’ pension costs are funded entirely by the state, including Chicago taxpayers. In FY16, CPS contributed $676 million for Chicago pensions out of its own resources, while the State contributed $3.7 billion for all other districts out of statewide resources. In June 2016, Springfield took action to begin to address this inequity, by passing legislation that would provide $215 million for the normal cost of Chicago teacher pensions for FY17, freeing up revenue to be spent on the classroom.
At the same time, in FY17, CPS’ contribution to the Chicago Teachers Pension Fund (CTPF) will continue to rise, reaching $721 million. This payment represents an increase of $45 million compared to FY16 and will consume 13 percent of the District’s operating budget. The District’s required pension contributions increase even more in the coming years – at $830 million in 2021 and more than $1.5 billion in 2059 – highlighting the need for a long-term solution on pension parity between CPS and other districts in the state.
Of all the School Districts in Illinois, Only CPS Faces a Crushing Pension Burden
CPS is in a uniquely difficult financial situation because it is the only school district in Illinois that is required to completely support its pension system. Teachers outside of CPS are part of the Illinois Teachers’ Retirement System (TRS), funded by the State from income and sales taxes, including those paid by Chicago taxpayers. However, CPS teachers are part of the CTPF, which is funded by Chicago property owners. The State took a major step forward in addressing this double-taxation of Chicago taxpayers, but will need to enact structural reform to address an inequity that is the main cause of the financial challenges that CPS faces.
Even though both systems are governed by State statute, there is a vast difference in how pensions are funded, and Chicago taxpayers are double taxed.
In FY16, the State made a $3.7 billion contribution to TRS. This amounts to a pension contribution for downstate and suburban school districts of $2,266 per student. In contrast, CPS received only $31 per student (Chart 1). Fortunately, leaders of every branch of government have recognized this disparity, and in FY17 provided some additional funding for Chicago teacher pensions. The latest TRS actuarial valuation indicates the state will make a $4.0 billion contribution to TRS in FY17, with the state contributing $227 million to CTPF. This amounts to a pension contribution in FY17 of $2,406 per student outside Chicago and $572 per student within Chicago.
Chart 1: State Per-Pupil Contribution Disparity for Teacher Pension Funds
In addition to providing most of the employer contribution for TRS, the State also funds the retiree health care plan for teachers outside Chicago. In FY16, the State provided an additional $108 million to support retiree health care for the 95,000 TRS retirees. At the same time, CPS contributed $65 million to CTPF for health care for 24,000 retirees but received nothing from the state.
Employees covered by CTPF also are required by statute to contribute 9 percent of their salary to pensions (the “employee contribution”). However, CPS has since 1981 paid 7 of the 9 percent for a total of $127 million budgeted in FY17 for participants in CTPF. CPS “picks up” the employee contribution in addition to its own employer contribution. The annual “normal” cost of the employer contribution to pensions in FY17 is projected to be approximately $215 million.
CPS’s Pension Contribution Requirements
Teachers and other employees with teaching certificates (e.g., principals) who work at CPS participate in the CTPF. The CTPF is governed by a 12-member Board of Trustees: six elected by the teacher contributors, three elected by the retirees, one elected by the principal contributors, and two appointed by the Board.
CPS is required to make an annual contribution to CTPF, based on an actuarial calculation, sufficient to bring to 90 percent the “funded ratio” of actuarial assets to liabilities by 2059. By statute, CPS is also allowed to offset its contribution by the amount of any State funding contributed to the pension fund. In FY16, CPS paid $676 million in pension payments to the CTPF, while the State contributed $12 million. This is in contrast to the State funding goal outlined in statute of 20 to 30 percent of its TRS contribution. If the State met the statutory funding goal in FY16, it would have contributed $740 million to CTPF instead of only $12 million.
In FY17, the State has pledged to cover normal cost of CPS pensions, $215 million, in addition to the previous $12 million annual contribution. This partially closes the pension funding inequity and reduces CPS’s FY17 pension contribution to $506 million.
Chart 2: CPS’ Required Employer Contributions to CTPF grows dramatically; FY 2017 State Contribution Needed Crucially on Ongoing Basis ($ in millions)
Decline in Funded Ratio Led to Increased CPS Contributions
As recently as June 30, 2001, CTPF had a funded ratio of 100 percent, and according to State law, CPS did not have to make an employer contribution. By June 30, 2004, the funded ratio had dropped to 86 percent, below a 90 percent threshold, and therefore CPS was statutorily required, beginning in FY06, to make employer contributions.
Chart 3: CTPF Funded Ratio Decreased Over Time, Rebounding Since Low in 2013
Causes of Decline in Funded Ratio
CTPF’s funded ratio decreased from 100 percent in 2001 to 52 percent in 2015, which represents a decrease of $9.6 billion over a 14 year period. As shown in Chart 4, investment returns below the assumed rates accounted for 36 percent of the decrease. Contributions statutorily set below what is required to cover the unfunded actuarial accrued liability (UAAL) accounted for another 41 percent, and the combination of plan experience, assumption changes and other smaller items accounted for the other 23 percent. Throughout this period, the State also did not meet its goal of providing CTPF with 20 to 30 percent of the annual funding it was providing to TRS.
Chart 4: Causes of Decrease Funded Ratio from 6/30/01 to 6/30/15*
*EE in the chart refers to Employee”and “ER” refers to Employer
Although many factors, including decisions at both the State and local levels, contributed to the decline, CPS now must make up the shortfall through increased contributions that divert money away from classrooms.
CPS's Pension Contributions Continue to Grow
Without long-term pension equity in Illinois, increasing pension payments will continue to draw resources that could otherwise be spent in the classroom. CPS’s required employer pension obligation will rise every year until 2059 in the absence of comprehensive pension funding equity. In FY17 however, CPS will be able to decrease its payment by $170 million compared to FY16, because of an additional $215 million from the state that is partially offset by a $45 million increase in the total FY17 required contribution.
CPS Employer Pension Contributions Will Continue to Grow Every Year until 2059 When 90% Funding Ratio is Reached
Pensions Crowd Out Classroom Spending
In the past three years, CPS has made almost $2 billion in pension payments to CTPF. Since FY14, when the pension payment jumped by $400 million to a total of over $600 million, CPS has turned to a series of one-time fixes to pay for pension costs and prevent significant school budget reductions. In FY14, the district used reserves to balance the budget and ended the year with expenses exceeding revenue by $513 million.
In order to make the full $634 million payment due for FY15, CPS had to borrow an extra $200 million on top of the $500 million it had already borrowed to address its cash shortages. The district made the full payment on time on June 30, 2015, but using borrowed funds. The following day, the district announced significant cuts.
To balance the FY16 budget and account for CPS’ nearly $700 million pension payment, CPS cut school budgets by nearly 5 percent in the middle of the school year, instituted three District-wide furlough days and drew down its nearly $900 million lines of credit.
For FY17, the General Assembly and Governor reached a compromise that allows CPS to reinstate a dedicated pension tax levy that that will produce new revenue directly for pensions. CPS may levy the new tax annually at a rate not to exceed 0.383%, and it is initially estimated to generate approximately $250 million per year. This new tax is not subject to the Property Tax Extension Limitation Law – more commonly known as “tax caps” – so in the future this portion of CPS’ annual employer contribution will not have a negative impact on spending in the classroom (see Senate Bill 318, now Public Act 99-0521).
Moreover, as part of the larger compromise, the Governor agreed to provide $215 million in discretionary funding to CTPF in FY17 – in other words, normal pension costs – when the General Assembly passes pension reform for the State retirement systems. Current language in the Illinois Pension Code allows CPS to deduct State contributions to CTPF from our employer contribution, so when Senate Bill 2822 ultimately becomes law, then CPS will receive an additional $215 million in pension relief in FY17. CPS takes seriously the State’s commitment and compromise to fund the District’s normal pension costs, and includes this commitment in the District’s budget.
The Continued Importance of Pension Funding Equity
For years, CPS has warned that its skyrocketing pension obligations must be addressed through legislative solutions or classroom budgets will be impacted. The unfortunate reality is that CPS has reached that breaking point, and it can no longer make pension payments with reserve funds and one-time fixes. The only alternative to draconian budget cuts in the near future is pension funding equity. The absence of legislative action will prove to be devastating.
CPS remains engaged with its partners in Springfield on potential options to resolve the District’s structural deficit.
Thanks to the actions taken by the General Assembly and Governor in the Special Session that ended June 30, 2016, CPS will be able to open schools on time this September and protect classrooms. Senate Bills 318 and 2822 represent important initial steps toward the goal of achieving true pension funding equity in Illinois. Chicago taxpayers are once again making a significant contribution to solving the District’s funding inequity with the new property tax created by SB318. In addition, SB 2822 is an important first step toward enshrining the principle of pension parity, but permanent reforms will need to be enacted for coming years. Ultimately, CPS’ structural budget deficit will not be eliminated until pension funding equity across Illinois is achieved for all districts, including our downstate, suburban and rural partners that are advocating for the state to fully and equitably fund education for students in poverty.