Set the record straight on teachers pension fund problems

August 6, 2013

Kevin Huber, Chicago Teachers Pension Fund
Kevin Huber, Chicago Teachers Pension Fund

The Chicago Teachers’ Pension Fund found itself at the center of controversy in recent days as dramatic headlines blamed pension payments for the Chicago Public Schools’ budget shortfall and the subsequent layoff of thousands of employees. Dramatic headlines may grab attention, but they obscure the truth. It’s time to set the record straight and ask CPS to accept responsibility for past mistakes — so that they are not repeated.

CTPF is a $9.5 billion pension plan that serves 60,000 teachers, administrators, and retirees of the CPS, including charter schools. Our members do not contribute to or receive Social Security, so their pension is their primary retirement security. All teachers are required to live in the city. More than 85 percent of CTPF beneficiaries live in Illinois, and 50 percent of these beneficiaries continue to live in the City of Chicago. CTPF benefit payments generate more than $1.5 billion in economic impact for Illinois and help create more than 11,500 jobs. In 2011, the average annual benefit was $41,584.

Our teachers have pensions for a reason — they provide stable retirements at less cost than other retirement programs. The pension equation is a simple one, which works when all sides are in balance. Teachers and employers contribute revenue, and our fund invests revenue and pays benefits. CTPF has invested prudently and has a 30-year rate of return of more than 8 percent. Our members have never missed a pension payment, investing 9 percent of their salary from each paycheck toward retirement.

CTPF currently owes members about $17 billion in future pension costs.  With $9.5 billion in the bank, it means we have about 54 cents for every dollar we owe. As recently as 2001, CTPF had more than $1 in assets for every $1 it owed.

So how did the equation fall out of balance?

Diverting pension funds

To understand this we need to examine the critical component of the pension equation — revenue. From the late 1920s until 1995, CTPF received a dedicated property tax revenue from the citizens of Chicago. CPS didn’t have a pension payment. CTPF invested the tax revenue and created one of the strongest retirement funds in the state.

Facing a budget crisis in 1995, CPS convinced the Illinois legislature to divert the dedicated CTPF levy into the CPS operating budget. Removing that guaranteed revenue source, however, fundamentally changed the structure of our fund and knocked the pension equation out of balance.

What happened next is the little-known yet critical part of our story. Instead of making the “normal” cost of pension payments, CPS used the money that would have gone to pensions for other purposes.  For a period of 10 years, 1996-2005, CTPF received no employer contributions.

Professional actuaries have determined the amount that the employer should have contributed during those years totaled more than $2 billion.  

Even with the strong investment returns CTPF earns, a fund cannot survive without stable revenue. When our funded ratio fell below 90 percent in 2006, CPS was forced to make payments for the first time in a decade. Instead of taking responsibility and paying the bills, CPS returned to Springfield in 2010, asking to reduce payments through a euphemism called a pension “holiday.” Legislation passed in 2010 allowed CPS to pay less than they owed, underfunding pensions by an additional $1.2 billion for three years from 2011-2013.

With the “holiday” ending in 2013, CPS returned to the Illinois legislature on May 31 to ask for an additional $350 million in relief. The measure failed, but no other solution was offered.

Call it a holiday or relief, but these euphemisms really meant that CTPF didn’t receive enough money to keep the pension equation in balance.

Sadly, the State of Illinois also has failed CTPF.  When CTPF lost the tax levy in 1995, the state agreed in principle to support CTPF at a rate proportional to the downstate teachers — but that funding failed to materialize. Instead, state funding for CTPF has fallen dramatically.

In 1995, we received about 23 percent of the funding provided to the Teachers’ Retirement System of the State of Illinois.  Today, we receive less than 1 percent — even though we have 18 percent of the state’s teachers. Funding promised from the state should have amounted to about $2.7 billion since 1995. Chicago’s taxpayers continue to fund downstate and suburban pensions, yet the state has failed to support Chicago’s teachers.

So what can we do? Much of the focus on pension funds has been on so called benefit reform — meaning the call has been to reduce benefits for members. Yet excessive benefits did not bring us to this point – a lack of revenue did. The CTPF Board of Trustees has taken the position that revenue reform must occur before benefit reform. We have seen the damage that a lack of revenue has done to our fund, and we need to remedy the situation.

Revenue reform could follow many paths, including increasing taxes, restoring our dedicated tax levy, refinancing the pension debt, or eliminating funding schemes that have caused artificially lower historical payments. The employees, employer, retirees and state must work together to come up with a plan that will stabilize CTPF.

CTPF has done — and continues to do — its part to solve the pension problem. We have acted cautiously and invested prudently. We have built a diversified investment portfolio which has exceeded our expected rate of return, but we can’t invest our way to financial security. We need revenue.

We know that excessive benefits didn’t cause this problem, and cutting benefits alone won’t solve it. We need to balance the pension equation and only responsible action from the employer can accomplish this. Teachers have looked at the past and learned difficult lessons. We hope CPS will do the same.

Kevin Huber is executive director of the Chicago Teachers’ Pension Fund.