NOTE: As of publication, Governor Rauner had issued an amendatory veto that jeopardizes funding for all school districts in Illinois, and has implications for Chicago teachers’ pensions.
Teachers and other employees have worked hard for their pensions, and the District’s priority is to protect employee benefits while preserving investments in schools to continue the academic progress our students have made.
For many years, pensions have been the single largest driver of CPS’ 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 with support from Chicago taxpayers that pay income tax revenues to the State to fund these pensions. In FY17, CPS contributed $733 million for Chicago pensions out of its own resources, while the State contributed $4 billion for all other districts out of statewide resources. In May 2017, Springfield took action by passing legislation to reform the education funding formula in a way that begins to address this inequity. This new funding formula would provide $221 million for the normal costs of Chicago teachers’ pensions, which only begins to bridge the gap between state funding for pensions that’s provided to every other district in the state.
At the same time, in FY18, CPS’ contribution to the Chicago Teachers Pension Fund (CTPF) will continue to rise, reaching $773 million. This payment represents an increase of $40 million compared to FY17 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 $849 million in 2021 and more than $1.7 billion in 2059 –highlighting the need for a long-term solution on pension parity between CPS and other districts in the state.
It is notable that the Chicago Teachers Pension Fund (CTPF) is better-funded than its downstate and suburban counterpart, the Illinois Teachers Retirement System (TRS). Additionally, in 1995, the State committed that it would provide the CTPF with 20 to 30 percent of what it provided TRS every year, and has failed to live up to that commitment. If the State had honored its commitment, it would have provided the CTPF with $5.7 to $9.1 billion from fiscal years 1995 to 2017.
CPS is the Only District in Illinois that Faces the Crushing Burden of Funding its Own Pensions
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 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 Illinois General Assembly took a major step forward in addressing this double-taxation of Chicago taxpayers with the passage of Senate Bill 1. This will create partial equity in the near-term, with the state picking up CPS teacher pension normal costs, and full pension equity in the long-term.
Even though both systems are governed by State statute, there has been a vast difference in how pensions are funded, and Chicago taxpayers have been double taxed.
In FY17, the State made a $4.0 billion contribution to TRS. This amounts to a pension contribution for downstate and suburban school districts of $2,447 per student. In contrast, CPS received only $12 million or $32 per student (Chart 1). Fortunately, members of the Illinois General Assembly have recognized this disparity, and in FY18 provided some additional funding for Chicago teacher pensions through Senate Bill 1. The latest TRS actuarial valuation indicates the state will make a $4.6 billion contribution to TRS in FY18, with the state contributing $233 million for Chicago teacher pensions. This amounts to a pension contribution in FY18 of $2,801 per student outside Chicago and $612 per student in 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 FY17, the State provided an additional $110 million to support retiree health care for TRS retirees. At the same time, CPS contributed $65 million to CTPF for retiree healthcare but received nothing from the state. The $65 million in retiree healthcare is included in the calculation of net normal cost and will be picked up by the state under Senate Bill 1 in FY 2018 and future years. The annual “normal” cost of the employer contribution to pensions in FY18 is projected to be approximately $221 million.
Employees covered by CTPF also are required by statute to contribute 9 percent of their salary to pensions (“employee contribution”). However, from 1981 through 2017, CPS 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. Under the 2015-19 Collective Bargaining Agreement with the Chicago Teacher’s Union, CPS will no longer pick up this 7 percent for employees hired on or after Jan. 1, 2017.
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 FY17, CPS paid $733 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 FY17, it would have contributed $797 million to CTPF instead of only $12 million.
For FY18, the General Assembly passed legislation to cover normal cost of CPS pensions ($221 million) with the requirement for the state to pick up in the additional $12 million still in statute. This partially closes the pension funding inequity and reduces CPS’s FY18 pension contribution to $551 million.
Chart 2: CPS’ Required Employer Contributions to CTPF Grows Dramatically;
SB 1 Funding Formula Needs Annual Funding Increases to Close Remaining Pension Equity Gap
($ 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
CPS’s Pension Contributions Continue to Grow
Without meaningful and consistent increases in funding for education, increasing pension payments will continue to draw CPS resources that could otherwise be spent in the classroom. The District’s required employer pension obligation will rise every year until 2059. In FY18, however, CPS might be able to decrease its payment by $182 million compared to FY17, due to an additional $221 million approved by the Illinois General Assembly that is partially offset by a $40 million increase in the total FY18 required contribution.
Chart 4: 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 four years, CPS has made more than $2.6 billion in pension payments to CTPF. Since FY14, when the pension payment jumped by $400 million to a total of more than $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 used 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 allowed CPS to reinstate a dedicated pension tax levy to produce new revenue directly for pensions. CPS may levy the new tax annually at a rate not to exceed 0.383%, and it will have generated approximately $250 million in FY17. 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 Act 99-0521). The Governor also agreed to provide $215 million in discretionary funding to CTPF in FY17 – in other words, normal pension costs – in FY17. Yet, the Governor vetoed this $215 million mid-year, requiring CPS to engage in further cuts and furlough days. To add insult to injury, the budget impasse put the state inordinately behind on paying grants to schools, shorting CPS over $300 million on grants owed in FY17. As a result of the Governor’s veto and this payment delay, CPS was forced to borrow even further to be able to make its FY17 pension payment.
For FY18, the General Assembly passed a new education funding formula based on recommendations from a bipartisan, Governor-convened education funding commission (Senate Bill 1). This bill would provide $221 million for CPS teacher pension normal cost and while it does not cover all of CPS’ pension costs, as the State does for all other districts, it does put the State on the path toward full pension parity once the formula is fully funded in the future. In the meantime, the bill will help CPS stave off draconian cuts and provide a line-of-sight toward financial stability.