Roots of the Chicago teacher pension crisis

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pension loose change

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Then


When state lawmakers gave Mayor Richard M. Daley control of Chicago Public Schools in 1995, the deal included sweeping changes to the laws that controlled how the district spent its money. The biggest revenue shift came from combining several property tax levies—including one earmarked to pay for teacher pensions—into one fund that could be used to pay current operating expenses. That year, $62.2 million was diverted from pension payments to operating expenses. CPS also contributed $24 million to the teachers pension fund that year.

This was not the first time CPS had used pension funds for the regular budget. Between 1990 and 1993, Springfield transferred dedicated pension revenue to district operations in order to pay for teacher raises and bonuses. (The Chicago Teachers Union backed the move.) But for the two years prior to mayoral control of Chicago’s schools, the district had only been permitted to borrow from the fund, not divert payments.

At the time Vallas and his administration won kudos for fixing the district’s longstanding budget woes, but without this provision and others granting greater budget flexibility, they would have been unable to balance the budget.

See “New law lets board shift money to balance budget,” in “The New Regime,” Catalyst September 1995

Now


State law requires CPS to ensure teacher pension assets total at least 90 percent of what will be owed to retirees 35 years in the future. Between 1995 and 2005, CPS was able to continue diverting pension payments because investment returns kept the funded ratio above the 90 percent threshold. In 2006, the ratio fell below 90 percent and forced CPS to pay.

Like many other public pension systems across the country, Chicago Public Schools is struggling with the double whammy of the Great Recession and increasing numbers of longer-lived retirees. The effects of the squeeze were felt by 2009, when the district projected a deficit of $475 million. Then-CEO Ron Huberman labeled the required pension payment of $130 million as one of a number of “deficit drivers.”

See “A Primer on Chicago’s teacher pension,” Catalyst March 2010 and “Set the record straight on teachers pension fund problems,” Catalyst August 2013

Next


Earlier this week, after efforts to seek help from Springfield failed, CPS managed to swallow a massive $634 million pension payment. As the Chicago Sun-Times reported, the district made the payment through borrowing and a pledge to cut $200 million, including as many as 1,400 layoffs.

Previously, Springfield lawmakers passed a bill to raise fines on charter operators who make late payments to the teacher pension fund. (Charter operators must contribute to the pension fund for all full-time, certified teachers working in Chicago charter schools.) “My goal is to look under every rock for every cent that we can get,” said Jay Rehak, president of the Chicago Teachers Pension Fund.

However, none of these fixes addresses the long-term structural problems. A recent working paper from the National Bureau of Economic Research notes that Illinois’ poor history of making contributions to state public employee pensions means that pension reform is not enough to solve their structural problems—new revenues or additional spending cuts will have to be addressed.

For many years, the Chicago Teachers Pension Fund was insulated from these problems. One long-overlooked consequence of the 1995 reform law is that Chicago is now in similarly dire straights. Current unfunded liabilities to the fund now total almost $10 billion. As Charles Burbridge, new executive director of the fund, told Catalyst in a recent Q & A, “Pension funding works when the employer pays for benefits as they are earned. When the employer doesn’t pay for those benefits, you get into problems.”

See “Charters to face steep fines for late teacher pension payments, “ Catalyst September 2013 and Q&A Charles Burbridge, Chicago Teachers Pension Fund Catalyst June 2015

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