Pensions continue to be the single largest driver of CPS’s structural deficit. The CPS contribution to the Chicago Teachers Pension Fund (CTPF) jumps another $84 million in FY15, to $697 million. Fortunately, the recently-passed state budget includes a $50 million state contribution to CTPF, decreasing the amount that CPS will have to pay by $50 million. Still, at $634 million, CPS’s contribution is the equivalent to nearly $1,600 per student, or 11 percent of our operating budget.
Chart 1: CPS’ Required Employer Contributions to CTPF grows dramatically1
($ in millions)
CPS’s Contribution Requirements
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 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.
New Actuarial Assumptions/Decline in Funded Ratio Lead 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 the 90 percent statutory threshold, and therefore CPS was statutorily required, beginning in FY06, to make employer contributions. Since then, the annual pension contribution has skyrocketed. Each year the Fund’s actuaries conduct a valuation and certify the contribution for the following fiscal year.
Prior to conducting the 2013 valuation, the CTPF actuaries conducted an actuarial experience review, which is typically done every five years. A number of the actuarial assumptions changed,2 most notably the investment return assumption, from 8 percent to 7.75 percent, and the mortality assumption. These new assumptions were the largest driver of the additional $84 million contribution for FY15.
Causes of Decline in Funded Ratio
The funded ratio decreased from 100 percent in 2001 to 49.7 percent in 2013. As shown below, investment returns below the assumed rates accounted for 40 percent of the decrease. Contributions statutorily set below what is required to cover the unfunded actuarial liability (UAAL) accounted for another 35 percent, and the combination of plan experience, assumption changes, and other smaller items accounted for the other 25 percent.
Of note, the decline caused by the liability-related experience and assumption changes was only 12 percent last year, while this year it is 24 percent. This shows the impact of the assumption changes made as a result of the actuarial experience review.
Chart 2: Causes of Decrease Funded Ratio 6/30/01 to 6/30/13
The bottom line is that, regardless 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 are governed by state statute, the state of Illinois makes nearly all the employer contributions for TRS, while CPS must make virtually all employer contributions for CTPF. The state will make a $3.4 billion contribution to TRS in FY15. For the first time since FY10, the state will contribute more than its $12.1 million statutory contribution, adding $50 million to help offset CPS’s contribution. However, the disparity between what the state funds on behalf of teachers outside of Chicago and for CPS teachers remains stark.
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 $101 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.
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 $134 million budgeted in FY15 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 for these employees, at a cost of $40 million in FY15.
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 a $405 million jump in payment in FY14 and an additional $84M increase in FY15, the contribution continues to grow every year until 2059. Yet, the stability of the pension fund is measured by the funded ratio, which will not reach 70 percent until 2049 when CPS is projected to owe nearly $1.5 billion per year in contributions.
Chart 3: CPS Employer Pension Contributions Will Continue to Grow
Pensions Crowd Out Classroom Spending
Two facts demonstrate the precarious financial circumstances the pension contributions force upon CPS. In FY14, CPS will make a $613 million contribution to the pension fund. At the same time, the FY14 budget was balanced using $562.5 million of one-time resources (fund balance). That means, effectively, that CPS had to use one-time resources to pay the recurring pension payment.
This pattern continues in FY15. With a $647 million pension contribution (net of the state contribution) and no other ways to balance our budget without impacting the classroom, CPS will again turn to one-time strategies. As described elsewhere in the budget document, CPS will make an accounting change to count revenues in August in the current year rather than the next budget year. We recognize that this change does not create new revenue but simply changes the accounting period in which the revenues are recorded. We know this does not address the underlying structural budget issues, but we also know that it is a bridge to help us get to a structurally balanced budget when we achieve pension reform.
Importance of Reform
The state has made promising progress toward addressing the statewide pension issues. Reforms to many of the state-funded systems, including TRS, were passed and signed into law. With litigation pending, the final outcome is not known. Similarly, legislation to reform two City of Chicago pension funds was passed and signed into law.
For CPS, 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 depend or will depend on it. Reform is necessary to address the structural deficit and ensure that our limited resources can be directed to the classroom. We have worked and will continue to work with members of the General Assembly, the union, and others until we achieve meaningful pension reform.
1Chart reflects total employer contributions to CTPF. From 2011 on, it reflects CPS’s contribution after the statutorily authorized offset for state contributions.
2After approval by the Board of Trustees.
3The $65 million is included in the overall $697 million contribution.