For many years, pensions have been the single largest driver of CPS’s structural deficit. Unlike all other school districts in Illinois, which receive full teacher pension funding from the state, CPS is required to fund its own teacher pension system while its taxpayers also pay into the pension funds of other districts. In FY 15, CPS contributed $634 million for Chicago pensions out of its own resources, while the state contributed $3.4 billion for all other districts out of statewide resources. As a result of inaction from the state to address this unfair burden on CPS, the District had to take money from the classroom to cover rising teacher pension costs .
In FY16, CPS’s contribution to the Chicago Teachers Pension Fund (CTPF) will continue to rise, reaching $676 million. This payment represents an increase of $42 million compared to FY15 and will consume 12 percent of the District’s operating budget.
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 support its pension system. Teachers outside of CPS are part of the state Teachers’ Retirement System, funded by the state from taxes, including those paid by Chicago taxpayers. However, CPS teachers are part of the CTPF, which is funded by Chicago taxpayers, with almost no support from the state. This double-taxation of Chicago taxpayers is inequitable and a 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 is at a great disadvantage.
In FY16, the state will make a $3.7 billion contribution to TRS. This amounts to a pension subsidy for downstate and suburban school districts of $2,266 per student. In contrast, CPS receives only $31 per student (Chart 1). The significant gulf in state pension support has created a structural budget crisis that will continue to divert scarce resources away from classrooms to cover pension payments until action is taken to correct this imbalance.
Chart 1: State Per-Pupil Contribution Disparity for Teacher Pension Funds
In addition to providing the employer contribution for TRS, the state also funds the retiree health care plan for teachers outside of Chicago. The state will provide an additional $108 million to support retiree health care for the 95,000 TRS retirees, while CPS will pay $65 million to CTPF for health care for 24,000 retirees.
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 percent of the 9 percent for a total of $131 million budgeted in FY16 for participants in CTPF. Non-teacher employees are part of a separate municipal pension system. CPS has historically paid 7 percent of the 8.5 percent employee contribution for these employees.
Beginning in September 2015, CPS will phase out the so called pension "pick-up" for non-union employees over three years. This will save an estimated $2.9 million in FY16 and $11.1 million when fully phased out in FY18.
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 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 percent the “funded ratio” of actuarial assets to liabilities by 2059. By statute, CPS is also allowed to decrease its contribution by the amount of any state funding contributed to the pension fund. In FY15, CPS paid $634 million in pension payments to the CTPF, while the state contributed only $62 million, for a total payment of $696 million. This is in contrast to the state funding goal outlined in statute of 20 to 30 percent of the state’s TRS contribution. If the state met that funding goal in FY15, it would have contributed $700 million to CTPF instead of $62 million.
While the state contributes vast amounts on behalf of all other school districts, it continues to place the full burden of pension funding on CPS. Without a fair contribution from the state, like it provides for all other districts, CPS’ FY16 payment is slated to increase to $676 million.
Chart 2: CPS’ Required Employer Contributions to CTPF grows dramatically ($ 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
Causes of Decline in Funded Ratio
The funded ratio decreased from 100 percent in 2001 to 52 percent in 2014, which represents a decrease of $9.4 billion over a 13-year period. As shown in Chart 3, investment returns below the assumed rates accounted for 37 percent of the decrease. Contributions statutorily set below what is required to cover the unfunded actuarial liability (UAAL) accounted for another 39 percent, and the combination of plan experience, assumption changes and other smaller items accounted for the other 24 percent. Note that throughout this period, the state failed to meet its goal of providing 20% - 30% of TRS funding to CTPF.
Chart 4: Causes of Decrease Funded Ratio from 6/30/01 to 6/30/14*
*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 Pension Contributions Continue to Grow
The mounting financial pressure from pensions will not disappear without funding equity and will continue to draw resources that could otherwise be spent in the classroom. CPS’ pension obligation is increasing by $42 million in FY16; payments will rise every year until 2059 in the absence of comprehensive pension funding equity.
Chart 5: CPS Employer Pension Contributions Will Continue to Grow Every Year Until 2059 When 90% is Reached
Pensions Crowd Out Classroom Spending
In the past two years alone, CPS has made more than $1 billion in pension payments. 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 $200 million of cuts.
To balance the FY16 budget and account for CPS’ nearly $700 million pension payment, CPS cut $200 million and eliminated 1,400 positions while reducing spending on programs from elementary athletics to facility repair and maintenance and teacher professional development. The FY16 budget further relies on $500 million in pension support, and if Springfield does not reach a resolution, the District will be forced to use a combination of deeper cuts that will directly impact classrooms and additional unsustainable borrowing. While additional cuts and borrowing are a last resort, both options are a very real possibility unless action is taken to address CPS’ structural deficit and its main driver, the District’s pension obligation.
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.
Mayor Rahm Emanuel has proposed two plans to reform the broken pension system and put CPS on sustainable economic footing. Plan A would create a single, uniform pension system across the state for teachers and taxpayers. This plan would put create parity between districts and benefit retirees and teachers outside of the city because the CTPF is better funded than the TRS.
Plan B is a comprehensive solution that would require shared investment from everyone with a stake in the system, including state government, teachers and Chicago taxpayers. Under Plan B, the state would cover the annual cost for teachers’ pension, excluding debt resulting from changing demographics, poor investment returns during the Great Recession and legacy costs due to the lack of payments beginning in 1995. In turn, teachers would make their full individual pension contributions and a small property tax levy would be authorized in Chicago to cover teacher pensions. To ease the state’s burden, all local school districts would be required to cover their own annual pension costs, but the state would pick up its historic legacy costs, which represent the largest portion of current pension debts. The Mayor’s plan also calls for reform of the state’s broken education funding system to provide more dollars to all school districts.
The Senate recently passed SB318, sponsored by Illinois Senate President Cullerton. This funding reform bill is an encouraging sign. It recognizes the state’s responsibility to contribute to Chicago teachers’ pensions and restores the property tax levy that was eliminated in 1995. It also provides immediate relief by limiting the amount that CPS must pay for the next two years. The bill creates a commission to address the broken education funding system. The long-term, equitable solution that solves CPS’s structural deficit remains elusive.
CPS has reached the point where our leaders in Springfield must act to prevent severe cuts to city classrooms. Thankfully, there are viable options on the table to address this crisis should lawmakers choose to act.