Pensions

The FY2025 Budget will include $1,015.5 million for the Chicago Teachers’ Pension Fund (CTPF). With strong investment returns thanks to a favorable market and changes in actuarial assumptions, this amount is $32.2 million less than what CTPF forecasted last year for FY25’s projected contribution. Funding from the State of Illinois (the State) also increased due to higher-than-expected payroll and additional changes in actuarial assumptions. Since the overall employer contribution requirement decreased from last year’s projection and the State’s contribution increased, CPS’ contribution decreased.

With a strong investment market in FY2022 and increased pension levy revenues, CPS did not need to spend any of its operating revenue on CTPF contributions for FY2023—the first time in the last twenty years where CTPF was wholly funded by dedicated state and local revenue sources. In FY2024, CPS had to once again divert operational revenue to help cover their statutory contribution. This will happen again in FY2025, albeit to a lesser degree than in FY2024. As yearly contribution estimates grow due to the pension payment ramp, CPS expects that for the next thirteen years the levy revenue alone will not be enough to cover CPS’ contribution to the CTPF. This means CPS will need to divert operating revenue to cover the difference.

The structural changes enacted in FY2017 and FY2018 that altered the funding mechanisms supporting the CTPF provided several key measures to ensure long-term pension health. In FY2017, the Illinois General Assembly granted CPS the ability to implement a property tax levy dedicated to funding the CTPF at a tax rate of 0.383 percent of the Equalized Assessed Value (EAV) of Chicago properties. That rate was then raised in FY2018 to a maximum rate of 0.567 percent. Additionally in FY2018, the State made a commitment to pay the employer’s normal cost for pension obligations, which is the amount of future pension benefits that CTPF-eligible employees will accrue over a given fiscal year. In FY2025, this normal cost comes out to 33.4 percent of the total employer contribution amount. Despite these improvements, CPS still bears legacy costs that have—aside from FY2023—required the use of operating revenue to cover the difference between the levy’s revenue and CPS’ statutory pension payment. Nonetheless, CPS continues to make all statutory contributions to the CTPF in accordance with the pension ramp, which has the mandate that CTPF be 90 percent funded by FY2059.

These costs are a burden unique to CPS. CPS remains the only school district in the State with its own teachers’ pension system separate from the statewide Teachers’ Retirement System (TRS). Full-time salaried CPS teachers and other licensed teaching staff are part of the CTPF, which, until recently, has been funded almost entirely by Chicago taxpayers with little support from the State. Under this arrangement, Chicago taxpayers have faced the unique burden of having to support both the CTPF and the TRS. Like all other working Illinoisans, portions of their income, corporate, and sales taxes paid to the State go toward funding TRS costs, but Chicagoans bear the additional burden of supporting most of the CTPF costs through property taxes and other local revenue streams.

Per the CTPF’s 2023 actuarial report, the total statutory, or required, employer contribution to the CTPF for FY2025 will be $1,015.5 million. Of that number, the State will pay $353.9 million, which is comprised of the projected normal cost of $338.7 million and $15.2 million to offset the benefit increases enacted under Public Act 90-0582 (this is set at 0.544 percent of the CTPF’s total payroll pursuant to Public Act 90-0655). This total of $353.9 million also includes $65 million in the form of a health insurance subsidy for retirees.

CPS’ required contributions for FY2025 amount to $661.6 million. The pension property tax levy is projected to raise $558.7 million in FY2025. This is up $1.6 million from the initial budget for FY2024. This means that the Chicago Board of Education will be responsible for funding the remaining $102.9 million differential out of their operating revenues to meet the total required contribution for CPS of $661.6 million. This projected operational diversion is less in FY2025 than FY2024 because CPS’ total required contribution is $38.2 million less in FY2025 than in FY2024. The operational diversion is down $39.8 million, from $142.7 million in FY2024 to $102.9 million in FY2025.

A Strong Market Boosts Funded Ratios for the CTPF

The funded ratio of the CTPF based on the actuarial value of assets (AVA) increased to 47.2 percent as of June 30, 2023, up from 46.8 percent on June 30, 2022. This actuarial value is determined by a four-year smoothing method that helps account for unexpected gains or losses and provides better baselines for long-term fiscal planning. Therefore, it is more stable year-to-year than the market value of assets (MVA) detailed below.

The increase in the funded ratio stems from a higher-than-expected return on the actuarial value of assets in FY2023, which came in at 6.8 percent instead of the assumed rate of 6.5 percent. When using the MVA to estimate, which examines the unadjusted returns within a fiscal year, we see that the funded ratio also rose from 45.3 percent as of June 30, 2022, to 46.3 percent as of June 30, 2023. While the return on market value of assets was 8.2 percent in FY2023, it was -8.6 percent in FY2022. As shown, market volatility can cause significant shifts in the MVA, which is why the AVA is a preferred smoothing measurement. For context, the ten-year average for market value investment return is 7.4 percent.

The unfunded actuarial accrued liability (UAAL) for CTPF shrunk by $5.6 million to $13.807 billion, driven primarily by higher-than-expected investment gains due to favorable market forces and new changes in actuarial assumptions. The UAAL is calculated by taking the total accumulated cost of pension benefits and subtracting the value of the total assets in the plan’s possession.

The State Continues to Fund CTPF at a Lower Rate than the TRS

The passage of state education funding reform in 2017 began to address a pension system that unfairly penalized Chicagoans. Even though both the CTPF and TRS are governed by state statute, there has been a vast difference in the source of funding for both pension systems. The State is projected to pay $353.9 million in FY2025 for CTPF teacher pension costs, which represents 35 percent of the total employer contribution. In comparison, the State is expected to contribute $6.2 billion to the TRS in FY2025, the vast majority of the employer contribution for this fiscal year. In FY2024, the State contributed $6.04 billion towards the mandatory employer cost for the TRS. School districts are mandated to contribute $79.2 million. An additional $25.7 million in contributions comes from federal funds, which means that school districts across the State are only required to contribute 1.3 percent of the required contribution amounts. When compared to CPS’ requirement to contribute 65.2 percent of total employer cost, the discrepancy becomes stark.

Another way to think about this difference is to examine the average contribution from the State to the two retirement funds on a per pupil basis. In FY2025, the State’s estimated contribution to TRS amounts to a pension contribution for downstate and suburban school districts of $4,154 per student, while CPS will only receive $1,100 per student.

CPS’ Employer Contribution Requirements: Diverting Operating Funds to Bridge the Gap

In FY2025 CPS is projected to contribute $661.6 million for Chicago teachers’ pensions, with $102.9 million of its own operating revenue and $558.7 million from the dedicated pension levy. The State will pick up the other $353.9 million, of which $338.7 million is for normal CTPF costs, and $15.2 million is for “additional” state contributions. These “additional” state contributions are statutorily required to offset the portion of the cost of benefit increases enacted under Public Act 90-0582 and are calculated as 0.544 percent of CTPF’s total teacher payroll.

In FY2023, $551.6 million of pension levy revenues made up the entirety of CPS’ contribution to the CTPF. In FY2024, CPS budgeted $557.1 million in levy revenue towards their statutory contribution, but that alone was not enough to meet the statutory obligation. While Chicago property values are projected to experience continued growth in the long term, bringing with it increased opportunity for additional revenue, the rate of increase for the levy revenues in FY2024 was not able to keep up with the need for additional funds to compensate for investment losses incurred over the prior year.

In FY2025, despite the decrease in total CPS employer contribution, the $558.7 million in projected levy revenue still is not enough to keep pace with the increasing mandatory contributions due to the pension payment ramp. CPS must once again divert $102.9 million in additional operating revenue to help complete the statutory contributions. Based on estimations of pension levy growth due to an increased EAV, CPS will continue to rely on operating revenue to bridge the gap of statutory contributions until approximately FY2034.

Pension Contributions by the State and Individual Employees

As the total employer contribution costs continue to increase in accordance with the actuarially required amount to reach a 90 percent funded ratio of CTPF by 2059, State contributions will shrink as a total share of the overall revenues used to cover this cost, if limited to just the normal cost and the “additional” 0.544 percent of payroll pursuant to Public Act 90-0655 to cover increased cost of benefit increases enacted under Public Act 90-0582.

In FY2025, the State’s contribution is projected to make up 35 percent of the total employer contribution, and this is scheduled to decline to 15 percent by 2059 if there is no further expansion of the CTPF’s employer cost assumed by the State. The normal cost borne by the State will gradually decline as a greater share of the workforce becomes “Tier II” teachers who are entitled to a less generous level of benefits than “Tier I” employees. CPS is reliant on the State continuing to add funding to the Evidence-Based Funding (EBF) model so that future pension costs do not prohibit us from investing in students and schools. If funding strategies are not changed at the State level, CPS expects their contribution to CTPF to double between FY2025 and FY2047—increasing from $661.6 million to $1,331.7 million. More discussion on the State’s EBF formula can be found in the Revenue chapter of the Budget Book.

Chart 4: The State Share of CTPF Contributions Will Shrink in Future Years ($ in Millions)

At the individual level, employees covered by CTPF are required by statute to contribute 9 percent of their salary to pensions. However, from 1981 through 2017, CPS paid the first 7 percent on the employee’s behalf, in addition to its own employer contribution. Under the 2019–24 Collective Bargaining Agreement with the Chicago Teachers Union, CPS no longer pays the initial 7 percent for “Tier II” employees hired on or after January 1, 2017, leaving them to contribute the entirety of that 9 percent.

Decline in Funded Ratio Led to Increased CPS Contributions

Until 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 the 90 percent threshold, and therefore CPS was statutorily required to begin making employer contributions. State funds would not begin to ramp up in earnest, however, until the passing of Public Act 99-521, which took effect in 2017. As seen in the graph below, despite the investment losses seen in FY2023, the District is on course to meet the FY2059 deadline of being 90 percent funded. A full explanation of the designated baseline ramp can be found in the FY2023 Actuarial Valuation Report.

MEABF Contributions

Employees of CPS  who do not participate in the CTPF participate in the Municipal Employees’ Annuity and Benefit Fund (MEABF). The MEABF is a City of Chicago pension annuity fund established to fund retirement for most civil service employees of the City of Chicago. Non-teacher employees of CPS are also allowed to be part of the fund.

The employer's proportionate share of collective pension expense is recognized as on-behalf payment as both revenue and expenditure in CPS' budget.