The FY2023 Budget continues to build on Chicago Teachers Pension Fund (CTPF) funding stability that began in 2017, when the state of Illinois passed structural changes to how CPS was allowed to fund the CTPF pension. The structural changes provided a dedicated property tax pension levy and a commitment by the state to pay the employer’s normal cost. This has greatly reduced the budgetary risk of funding the District’s pension obligations through operating funds and put CPS on a path to pension funding stability. Though the majority of funding still comes from Chicago taxpayers, the FY2023 budget will represent the first time that teacher pension costs are fully covered by dedicated local and state pension revenue. This has reduced the District’s diversion of funds eligible to support classrooms from an all-time high of $676 million in FY2016.
CPS remains the only school district in the state with its own teachers’ pension system that is separate from the statewide Teachers’ Retirement System (TRS). Full-time salaried CPS teachers and other licensed teaching staff are part of the Chicago Teachers’ Pension Fund (CTPF), which, until recently, has been funded 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, their income, corporate, and sales taxes paid to the state fund TRS costs, but Chicagoans alone support the CTPF through property taxes and other local revenue streams.
As part of education funding reform, the state has taken steps to address this long-standing inequity. Beginning in FY2018, the state has contributed funding in the amount of CPS teacher pension normal costs (i.e., the cost of the benefits that are projected to be created in the current year). In FY2023, the state will provide $308.7 million for these costs.
In addition, beginning in FY2017, the state authorized a dedicated tax on Chicago property owners that is appropriated exclusively for paying CTPF costs. A 0.567 percent maximum levy on the adjusted Equalized Assessed Value (EAV)1 of Chicago properties goes toward covering CPS’ statutory obligations to the CTPF. In FY2023, this tax will provide $551.6 million in funding for teacher pensions.
In FY2023, per the CTPF’s 2021 actuarial report2, the total required employer contribution to the CTPF will be $860.3 million. Of that number, the state will pay $308.7 million (comprising the projected normal cost and 0.544 percent of the CTPF’s total payroll, pursuant to Public Act 90-0655) and the pension property tax levy is projected to raise $551.6 million.
In previous fiscal years, CPS has contributed additional operating revenue to fund the gap between funding provided through these two sources and the amount the Chicago Board of Education is contractually required to contribute. However, in FY2023 CTPF experienced a highly favorable market value of assets which contributed to a reduction in the funding gap. As such, CPS does not foresee a need to contribute additional operating revenues for FY2023.
Chart 1: Projected FY2023 Funding for Required CTPF Employer Contributions ($ in Millions)
The funded ratio of the CTPF based on the actuarial value of assets increased to 47.48 percent as of June 30, 2021, up from 46.69 percent on June 30, 2020. A modest increase in the funded ratio occurred as a result of gains on investments despite changes to the actuarial assumptions used in CTPF’s valuation. Most notably, CTPF decreased the investment return assumption from 6.75 percent to 6.5 percent. The unfunded actuarial accrued liability (UAAL) grew by $359 million to $13.2 billion.
There Remains a Large Disparity in how the TRS and CTPF are Funded by the State
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 of Illinois is projected to pay $308.7 million in FY2023 for CTPF teacher pension costs, which represents 35.9 percent of the total employer contribution. In comparison, the state is projected to contribute $5.89 billion toward the employer contribution to the TRS, which is nearly 95 percent of the total employer contribution.3
In FY2023, the state’s estimated contribution to TRS amounts to a pension contribution for downstate and suburban school districts of $5,069 per student, while CPS only received $956 per student (Chart 2). Before the state began to pick up the normal cost in FY2018, the disparity between Chicago and all other school districts in Illinois was significantly larger.
Chart 2: State Per-Pupil Contribution Disparity for Teacher Pension Funds
CPS’ Pension Contribution Requirements as an Employer
In FY2023, CPS is projected to contribute $551.6 million for Chicago pensions out of its own resources, with the state picking up the other $308.7 million. Of the $308.7 million in state funding, $295.3 million is for CTPF normal costs, and $13.4 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, revenues from the pension levy, estimated at $551.6 million, make up all of CPS’ contribution to the CTPF. The pension levy which began in FY2017 as part of pension reform at an initial flat rate of 0.383 percent of Equalized Assessed Value (EAV), which increased to the current 0.567 percent rate in FY2018. Chicago property values are projected to experience continued growth in the long-term after the fiscal effects of COVID-19 have abated, and as such, the pension levy will generate more revenue in future fiscal years.
A combination of investment performance that exceeded the actuarial assumptions of the CTPF, and an increase in property values due to reassessments, means that FY2023 is the first year since the start of the pension levy where CPS is not obligated to divert additional operating funds to cover CTPF employer contributions. Additionally, this performance change re-sets the ramp for the CTPF to reach its 90 percent funded rate by 2059, meaning that necessary contributions will continue to be lower than previously forecasted through at least 2032.
Chart 3: Diversions from Operating Revenues are Projected to Continue until 2041 ($ in Millions)
Pension Contributions by the State and by Individual Employees
As the total employer contribution costs continue to increase in accordance with the actuarially required amount to reach a 90 percent funding 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. In FY2023, the state’s contribution is projected to make up 35.9 percent of the total employer contribution, and this is scheduled to decline to 12 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 covered by CTPF comprises “Tier II” teachers who are entitled to a lower level of benefits. 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. 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 Costs 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 2020-24 Collective Bargaining Agreement with the Chicago Teachers Union, CPS no longer pays 7 percent for “Tier II” employees hired on or after January 1, 2017.
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 a 90 percent threshold, and therefore CPS was statutorily required to make employer contributions beginning in 2006.
Chart 5: CTPF Funded Ratio Has Generally Decreased Since Early 2000s (Actuarial Value of Assets)
Chart 6: CPS Employer Pension Contributions Will Continue to Grow Every Year, With the Majority Covered by the Pension Levy
Employees of CPS that 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 servant employees of the City of Chicago. Non-teacher employees of CPS are also allowed to be part of the fund. Under current State Statutes, the Chicago Board of Education is not legally obligated to fund annual statutory requirements of the MEABF, however FY2023 marks the fourth year that CPS covered some of the costs associated with its non-teaching employees participating in the MEABF as part of an Inter-Governmental Agreement (IGA) with the City of Chicago. Prior to FY2020, the City of Chicago covered the entire cost of the MEABF employer contribution for both the City of Chicago and CPS. As part of the current IGA, Chicago Board of Education will pay approximately 66 percent of the estimated contribution requirement for CPS employees or $175 million to the City in FY2023 to fund a portion of the City’s obligation to the MEABF.
- Per 105 ILCS 5/34-53 and 35 ILCS 200/18-45, CPS has the ability to tax up to a 0.567 percent levy on the prior year’s taxable non-TIF base property, and the current year’s taxable non-TIF new property.
- https://www.trsil.org/sites/default/files/documents/2021Actuarial%20Valuation_Final.pdf, pg. 10