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FY15 Budget
Attendance and Truancy

Chicago Public Schools Fiscal Year 2013 Amended Budget

Pensions

Pensions:

 

Like most public entities, the growing cost of employee pensions is the biggest financial challenge facing Chicago Public Schools (CPS). By FY2014 under existing legislation, CPS will be required to spend $534 million (more than 10 percent of its operating budget) on contributions to the Chicago Teachers Pension Fund (CTPF). This represents an increase of $338 million from the FY2013 contribution, the last year of legislative pension relief. Even at this contribution level, CTPF will still have a funded ratio below 60 percent, considered weak by many observers, and an unfunded liability of approximately $8 billion. Without reform from the state, CPS's required annual contributions will continue to grow, and by FY 2040 will exceed $1 billion annually. At that point, the funded ratio is still estimated only to be 66 percent. Significant reform is essential to ensure that pension benefits continue to be available to CPS retirees.

 

Background

Teachers and others with teaching certificates (such as principals) who work at CPS participate in the CTPF. Teachers in school districts outside of Chicago participate in a state-funded pension system, the Teachers' Retirement System (TRS). Both systems have similar demographics.

 

Table I: CTPF v. TRS

 

 

CTPF

TRS

Number of Retirees

21,977

90,967

Average Monthly Benefit

$3,788

$3,871

Average Age

72

70

Average Years of Service

28

28

 

Source: CTPF: Actuarial Valuation as of 6/30/11 and
CPS; TRS: Comprehensive Annual Financial Report for Fiscal Year Ending 6/30/11

 

Retirees receive a defined benefit annuity. Teachers in both systems are eligible to retire at age 55 with 35 years of service, age 60 with 20 years of service, or age 62 and five years of service. An employee who has reached age 55 and has 20 years of service may retire, but will receive a smaller annuity. Retirees receive a 3 percent annual compounded cost of living adjustment (COLA) starting at age 61 for CTPF and for TRS starting immediately.

 

These factors and other demographics are used by actuaries to calculate the cost of benefits into the future. Based on this future cost (referred to as "actuarial liability"), an annual contribution amount is calculated to be invested for the future, which is the "employer contribution." The funding target is to have assets equal to 90 percent of the liability by 2059; this represents a "funded ratio" of 90 percent.

 

For TRS, the state of Illinois makes virtually all employer contributions. For CTPF, CPS must make the employer contribution. CPS is the only district in the state that has this requirement.

 

Funded Ratio Decline 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 (it has continued dropping since that time), and CPS was statutorily required in FY2006 to begin making employer contributions. Since then, the annual pension contribution has skyrocketed. Had the legislature not granted CPS temporary relief from those contributions, the amounts owed in FY2011-2013 would have been much higher than the approximately $195 million it has been.

 

Chart 1: CPS Statutorily Required Employer Contributions to CTPF grows dramatically

Chart 1: CPS Statutorily Required Employer Contributions to CTPF grows dramatically

 

 

The funded ratio decrease from 100 percent in 2001 to 60 percent in 2011 was due to a number of factors, as a review of the data by Aon Hewitt for CPS shows:

  • More than half (52 percent) of the decrease is due to investment returns below what was projected
  • About one-third (31 percent) is due to statutory employer contributions set below what was required to cover "normal cost" (i.e., the value of the benefits earned by employees each year)
  • 16 percent is due to experience and assumption changes in the actuarial model (such as life expectancy)
  • 1 percent is due to benefit increases

 

 

Chart 2: Causes of Decrease Funded Ratio 6/30/01 to 6/30/11

Chart 2: Causes of Decrease Funded Ratio 6/30/01 to 6/30/11

 

 

The bottom line is that, independent of the reason for the decline, CPS must make up the shortfall through increased employer contributions. This is where CTPF and TRS are most dramatically different. No Illinois school district other than CPS is required to support its pension system. The state of Illinois makes nearly all the employer contributions for TRS, while CPS must make virtually all employer contributions for CTPF. The state only makes a nominal $10 million contribution to CTPF (as shown in Chart 1), but will make a $2.7 billion contribution to TRS this year.

 

Pension Contributions Continue to Grow

The financial pressure from pensions threatens to crowd out spending in the classroom, as pensions take an increasing share of the annual budget. In the long term, pension contributions will continue to grow, yet the stability of the pension fund, as measured by the funded ratio, will not reach 70 percent until 2047, when CPS is projected to owe about $1.2 billion per year in contributions.

 

 

Chart 3: CPS Employer Pension Contributions Will Continue to Grow

Chart 3: CPS Employer Pension Contributions Will Continue to Grow

 

 

FY2013 Budget

The FY2013 budget reflects an employer contribution to CTPF of $196 million, the equivalent of 10.6 percent of salaries. However, this amount is artificially low and was set in statute as part of the three-year pension relief provided by the General Assembly in 2010. As illustrated in Chart 1 above, FY2013 is the last year of legislative pension relief, and in FY2014, CPS will be facing an estimated $338 million increase in employer contribution, as the contribution returns to the actuarially established contribution of $534 million.

 

In addition to the employer contribution, 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 $127 million budgeted in FY2013 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 at a cost of $40 million in FY2013.

 

Importance of Reform

The governor and state legislature have recognized that pensions are a huge burden for the state and have been actively engaged in discussions around pension reform. Various proposals for reform have been put forward and CPS recognizes that without legislative support and action, overcoming the financial obstacles created by pensions is nearly impossible.

 

 

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