For several years, CPS has described the financial cliff facing the district because of growing teacher pension costs. In FY14, we must face that cliff. Pension costs have jumped $405 million, so that our statutorily required pension contribution for this budget year is $612.7 million. This represents over 10% of our operating budget and is the single largest driver of our deficit for FY14. We cannot solve this problem by ourselves. Every aspect of pensions—from the benefits provided, to eligibility, to the amount we must contribute—is set in statute and requires legislative and gubernatorial action to change. We must turn to our state leaders to pass a pension reform proposal that will address this unfair and heavy financial burden that is crowding out spending on the classroom.
Chart 1: CPS Statutorily Required Employer Contributions to CTPF grows dramatically1
Decline in Funded Ratio Led to Increased CPS Contributions
Teachers and others with teaching certificates (such as principals) who work at CPS or at charter schools participate in the Chicago Teachers Pension Fund (CTPF). CTPF is governed by a 12-member Board of Trustees: six elected by the teacher contributors, three elected by the annuitants, 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% the “funded ratio” of actuarial assets to liabilities by 2059.
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 (it has continued dropping since that time) and CPS was statutorily required in FY2006 to begin making employer contributions. Since then, the annual pension contribution has skyrocketed. Had the legislature not granted CPS temporary relief from those contributions, the amount owed in FY2011-2013 would have been much higher than the approximately $200 million it was, and the pressure on CPS’ budget would have been greater.
Causes of Decline in Funded Ratio
The funded ratio decreased from 100 percent in 2001 to 54.1 percent in 2012. This was due to a number of factors, as a review of the data by Aon Hewitt for CPS shows:
Chart 2: Causes of Decrease Funded Ratio 6/30/01 to 6/30/12
- More than half (53 percent) of the decrease is due to investment returns below what were projected
- About one-third (34 percent) is due to statutory employer contributions set below what was required to cover “normal cost” (i.e., the value of the benefits earned by employees each year)2
- 12 percent is due to experience and assumption changes in the actuarial model (such as life expectancy)
- 1 percent is due to benefit increases
The bottom line is that independent of the reason for the decline CPS must make up the shortfall through increased contributions.
Only CPS Faces a Crushing Pension Burden
No Illinois school district other than CPS is required to support its pension system. Teachers outside of Chicago are part of the Teachers’ Retirement System. Even though both systems provide nearly identical benefits and have very similar demographics (see Appendix), the state of Illinois makes nearly all the employer contributions for TRS, while CPS must make virtually all employer contributions for CTPF. The state only makes a nominal $11.9 million contribution to CTPF (as shown in Chart 1), but will make a $3.4 billion contribution to TRS this year.
In addition to providing the employer contribution for TRS, the state also funds the retiree health care plan for teachers. The state will provide an additional $90 million to support retiree health care for the 95,000 TRS retirees, while CPS will pay $65 million to CTPF3 for health care for 22,000 retirees.
CPS Pension Contributions Continue to Grow
The financial pressure from pensions will not go away and will continue to draw resources that could be spent in the classroom. Even after an enormous jump in payment for this year, the contribution continues to grow every year until 2059. Yet, the stability of the pension fund as measured by the funded ratio will not reach 70 percent until 2051 when CPS is projected to owe approximately $1.5 billion per year in contributions.
Chart 3: CPS Employer Pension Contributions Will Continue to Grow
Full Effect of Pensions Crowding Out Spending in the Classroom is Dampened by Use of One-Time Resources in the FY2014 Budget
The FY2014 budget reflects an employer contribution to CTPF of $612.7 million, an increase of $405 million from the FY2013 contribution of $208 million. Because of the failure of the state to pass pension reform, we are facing this increase. It could be argued that $405 million of the $562.5 million of unrestricted fund balance we are using to balance this budget is the direct result of the pension increase. Once those one-time resources are used in FY2014, the district will face even more difficult decisions in FY2015 and beyond as the trade-off between funding pension contributions and putting dollars in the classroom becomes even more stark. There will be nowhere to turn to cover these growing costs.
In addition to the employer contribution, employees also are required by statute to contribute 9 percent of their salary to pensions (called the “employee contribution”). However, CPS pays 7 percent of the 9 percent for a total of $128.5 million budgeted in FY2014 for participants in CTPF. Non-teacher employees are part of a separate, municipal pension system. CPS also pays 7 percent of the 8.5 percent employee contribution at a cost of $39.8 million in FY2014.
Importance of Reform
We cannot overstate the importance of pension reform. It is necessary to ensure the stability of the pension fund for the thousands or retirees that do or will depend on it. Reform is necessary to ease the financial burden on the district and ensure that our limited resources can be directed to the classroom. We have and will continue to work with members of the General Assembly, the union, and others until we achieve meaningful pension reform.
1 This reflects the gross contribution set out in the actuarial report. It does not reflect the offset permitted in statute for any state contribution.
2 It is worth noting that even during the three years of legislatively-granted pension relief, CPS’ contribution was sufficient to cover normal cost.
3 The $65 million is included in the overall $612.7 million contribution.