January 6, 2012

Pensions vs. schools: Chicago Public Schools CPS pension costs rising faster than state aid can keep up
The problem Every year, Chicago Public Schools, or CPS, asks the state for more funding. But even if state government allocates more dollars toward CPS, not all of those dollars will make it to the classroom. This is because teacher retirement costs at CPS are rapidly outpacing state aid. In 2014, CPS teacher retirement expenditures will equate to nearly 50 percent of the education dollars CPS receives from the state. While state support for CPS is set to increase by $40 million between fiscal years 2013 and 2014, CPS retirement expenditures will climb by approximately $480 million1. Even the 2011-2012 budget for CPS acknowledges that escalating pension and debt costs threaten to crowd out spending on classrooms.2 CPS is the largest school district in Illinois, with more than 400,000 students enrolled in 617 schools3. State funding is an important revenue source for Chicago schools, and it has represented approximately 30 to 40 percent of total, annual CPS revenue since 19984. And while state funding is not dedicated to spending on teacher retirements at CPS, the fact is retirement spending will grow at a pace that far exceeds new state dollars.

Tax & Budget Brief

Graphic 1. Projected CPS teacher retirement expenditures by type, fiscal years 2010 to 2020

Source: Commission on Government Forecasting and Accountability, Chicago Teachers Pension Fund and Illinois Policy Institute calculations. Assumes health care expenditures and CPS teacher payroll grow at 3 percent annually.

Amanda Griffin-Johnson is a Senior Budget and Tax Policy Analyst with the Illinois Policy Institute.

Page 2 of 7

Graphic 2. Chicago Public School revenue sources: All funds, fiscal years 1998-2010

While state support for CPS is set to increase by $40 million between fiscal years 2013 and 2014, CPS retirement expenditures will climb by more than $400 million.

Source: Chicago Public Schools Comprehensive Annual Financial Report

Teachers in CPS are part of the Chicago Teachers Pension Fund, or CTPF. This pension fund is separate from the states Teachers Retirement System, or TRS, for suburban and downstate teachers. TRS is severely underfunded, and is facing significant financial challenges in the decades to come. CTPF may be better funded than its downstate counterpart, but it will soon face problems of its own. CTPF was more than 90 percent funded in 2003. Since then, however, the funding level has fallen below 70 percent5. CPS pays an annual contribution to the CTPF, plus an additional contribution in years that the fund is less than 90 percent funded. On top of those expenditures, the district also has to pay for retiree health care and a portion of the employee contribution to pensions. Although employees are supposed to contribute 9 percent of their salary to their retirement, the Chicago Teachers Union has negotiated for teachers

to pay only 2 percent of their salary toward their own retirements; the district picks up the 7 percent remaining share of teachers contributions. The districts pick up of the employee contribution is a considerable expense. In fiscal year 2012, CPS estimates its portion of the pickup will total $146 million6. In 2010, the Illinois General Assembly passed two pieces of legislation that affected CPS. Public Act 096-0889 and Public Act 096-1490 created a second tier of pension benefits with higher minimum retirement ages and caps on benefits for new employees hired after January 1, 20117. Public Act 096-0889 also extended to fiscal year 2059 the time frame in which the CTPF had to reach 90 percent funding; previously, the fund only had to reach 90 percent funding by fiscal year 2045. In addition, the legislation granted CPS a partial pension holiday for fiscal years 2011 through 20138.

Page 3 of 7

Graphic 3. projected state pK-12 fundinG for chicaGo compared to cps teacher retirement spendinG (dollars in millions)

Source: Commission on Government Forecasting and Accountability, the Chicago Board of Education and Illinois Policy Institute calculations. See appendix for more information.

Over those three years of partial pension holidays, CPS was allowed to contribute less than the actuarially recommended amount to the pension. When the pension holidays end in fiscal year 2014, the citys annual teacher pension contribution is set to increase by more than 225 percent to $684 million, up from $208 million in fiscal year 20139. After this increase in the level of pension contributions, Chicagos teacher retirement expenditures will equal 49 percent of the PK-12 education funding CPS receives from the state. In 2010, CPS predicted 40-student classrooms and school closures because of a dire budget situation, so the districts CEO at the time, Ron Huberman, asked the state for a pension reprieve10. While the pension holidays may have seemed like budget relief for CPS, it only delayed the inevitable pension avalanche facing Chicago. Pension holidays simply kick the can down the road, but the problems do not go away. Without lasting

solutions, there will be doomsday predictions for Chicago schools year after year. CPS is not the only Chicago pension fund that will be facing budgetary challenges in the future. Graphic 4 (page 4) shows that other Chicago pension funds have payments set to significantly increase. In order to meet its growing obligations and close a $636 million gap in its overall budget this year, the city made some tough budget cuts and increased fines and fees.11 As Graphic 4 shows, police and fire pension contributions will increase, putting further pressure future city budgets. Trying to squeeze more revenue out of Chicago taxpayers could push even more residents out of the city. Between 2000 and 2010, data from the U.S. Census Bureau shows that Chicagos population decreased 6.9 percent12. Chicago local governments need the benefit flexibility that is only available through pension reform.

Pension holidays simply kick the can down the road, but the problems do not go away. Without lasting solutions, there will be doomsday predictions for Chicago schools year after year.

Page 4 of 7

Graphic 4. chicaGo pension systems: required cps and city pension fund payments, 2011-2020

Source: Commission on Government Forecasting and Accountability

Page 5 of 7

The solution State lawmakers are under pressure to send more funding to PK-12 education in Chicago, but the state is not in a financial position to do so. Retirement funding for downstate and suburban PK-12 education and higher education is set to skyrocket and is threatening to crowd out appropriations for those classrooms and schools in future years. Additionally, the federally mandated expansion of Medicaid through the Patient Protection and Affordable Care Act will cost Illinois $10 billion between 2014 and 201913. Financial support from the state will not be forthcoming. However, the state can improve the situation in Chicago through changes in the law. Today, the Illinois General Assembly sets the rules that determine CPS teacher pension benefits, but the district is responsible for funding the system. Instead, the state can provide support by giving CPS greater control over the level of pension benefits they would like to offer employees. In order to create a sustainable pension system, CPS should consider decreasing future benefits for current employees or moving employees to a defined contribution system. Additionally, as part of the next collective bargaining agreement, CPS could require employees to contribute more of or the entire employee share of their retirement savings, of which the district currently pays the majority as a perk for teachers. This would save the district as much as $150 million annually14. Chicago needs a retirement system that reflects the financial reality of the school district and also collects an appropriate share of payroll to cover the costs of benefits.

Why this works Chicago public schools are facing a pension showdown in the imminent future. The state is facing increasing Medicaid and retirement costs in coming years, and CPS cannot rely on the state to significantly increase funding to the district. Another pension holiday would just be a short-term patch, making CTPFs funding level, and future retirement payments, even more precarious. In the long-run, such fiscal irresponsibility weakens the retirement funds ability to pay out pensions to retired teachers and will require even greater contributions from the school district. If the state puts control of the pension benefit system at the local level, by allowing the district to determine the pension benefits and rules for CTPF, the district will be able to manage its own financial future. Chicago can look also to state level pension reforms that are being proposed to start developing its own pension solutions. While additional employer contributions seem unavoidable, employees will also need to participate in ensuring the sustainability of the pension system. The pension crisis in CPS is just a few years away, so now is the time for reform. Left unchanged, retirement expenses will pressure the CPS budget and negatively impact classrooms. Real pension reform that fundamentally changes future benefits and funding is necessary to move forward at both the state and local level.

In order to create a sustainable pension system, CPS should consider decreasing future benefits for current employees or moving employees to a defined contribution system.

Page 6 of 7

Appendix
Methodology This report uses state funding figures from the comprehensive annual reports of Chicago Public Schools to determine the states PK-12 funding for Chicago. CPS pension expenditures are calculated by taking required employer contributions to the Chicago Teachers Pension Fund, or CTPF, from the Commission on Government Forecasting and Accountability, or COGFA15. These required contributions are added to retiree health care cost data from CTPF comprehensive annual financial reports. Finally, while the employee contribution to pensions is legally expected to be 9 percent of teacher salary, through collective bargaining, CPS has agreed to pick up 7 percent, while employees pay 2 percent. Using payroll figures from CTPF comprehensive annual financial reports, this report estimates the 7 percent pick up CPS pays annually and assumes this practice will continue in future years. CPS required contributions to CTPF + retiree health care + 7 percent pick up of employee contribution = CPS pension expenditures Assumptions State PK-12 education funding to CPS will grow at 2.3 percent annually. This is the rate the COGFA estimates revenue will grow at in coming years16. Retiree health care costs will grow at 3 percent annually. This is a conservative estimate of health care cost growth which COGFA uses for some retiree health programs, such as the Teachers Retirement Insurance Program and the College Insurance Program17. In fact, the 2012 budget for CPS estimates that health care costs will grow at 8 percent annually in future years18. CPS teacher payroll will grow at 3 percent annually. COGFA estimates that employee contributions for the Chicago Teachers Pension Fund would grow at 3 percent annually in future years19. If employee contributions grow at 3 percent annually without a change in contribution policy, it is sensible to extrapolate that payroll will also grow at approximately 3 percent annually. CPS will continue to pick up 7 percent of the employee contribution. As the 7 percent pick up policy is part of the current collective bargaining agreement, this analysis assumes this policy continues into future years. Guarantee of quality scholarship
The Illinois Policy Institute is committed to delivering the highest quality and most reliable research on matters of public policy. The Institute guarantees that all original factual data (including studies, viewpoints, reports, brochures and videos) are true and correct and that information attributed to other sources is accurately represented. The Institute encourages rigorous critique of its research. If the accuracy of any material fact or reference to an independent source is questioned and brought to the Institutes attention in writing with supporting evidence, the Institute will respond. If an error exists, it will be corrected in subsequent distributions. This constitutes the complete and final remedy under this guarantee.

Page 7 of 7 Endnotes
1 Commission on Government Forecasting and Accountability, Illinois Public Retirement Systems, January 2012. <http://www.ilga.gov/commission/cgfa2006/Upload/ FY2011SmallSystemsReport.pdf>. 2 Chicago Public Schools, Final Budget 2011-2012, <http:// www.cps.edu/About_CPS/Financial_information/Documents/ FY12FinalBudgetBook.pdf>. 3 Illinois State Board of Education, Interactive Report Card, <http://iirc.niu.edu/District.aspx?districtid=15016299025>. 4 Chicago Public Schools, Comprehensive Annual Financial Report Fiscal Year 2010, <http://www.cps.edu/About_CPS/ Financial_information/Documents/FYBudget2010.pdf>. 5 Commission on Government Forecasting and Accountability, Illinois Public Retirement Systems, January 2012. <http://www.ilga.gov/commission/cgfa2006/Upload/ FY2011SmallSystemsReport.pdf>. 6 Chicago Public Schools, Final Budget 2011-2012, <http:// www.cps.edu/About_CPS/Financial_information/Documents/ FY12FinalBudgetBook.pdf>. 7 Chicago Teachers Pension Fund, Comprehensive Annual Financial Report FY 2010, July 2011. <http://www.ctpf.org/ general_info/Financial_lists.htm>. 8 Chicago Teachers Pension Fund, Comprehensive Annual Financial Report FY 2010, July 2011. <http://www.ctpf.org/ general_info/Financial_lists.htm>. 9 Chicago Teachers Pension Fund, Comprehensive Annual Financial Report FY 2010, July 2011. <http://www.ctpf.org/ general_info/Financial_lists.htm>. 10 Ahmed, Azam. CPS Faces $1 Billion Deficit, Huberman Says. Chicago Tribune. 12 Oct. 2011. <http://articles. chicagotribune.com/2011-10-12/news/chi-police-station-closings-feefine-increases-eyed-in-emanuels-first-budget-proposal-20111012_1_ mayor-rahm-emanuel-first-budget-budget-shortfall>. 11 Chicago City Council passes budget. Associated Press. 16 Nov. 2011. < http://www.boston.com/business/ articles/2011/11/16/chicago_city_council_passes_budget/>. 12 Chicago (city) QuickFacts from the U.S. Census Bureau. State and County QuickFacts. U.S. Census Bureau. <http://quickfacts.census.gov/qfd/states/17/1714000.html>. 13 Ingram, Jonathan. Overloaded: One in three Illinoisans on Medicaid by 2019? Illinois Policy Institute. 20 Oct. 2011. <http://illinoispolicy.org/uploads/files/overloaded10-20.pdf>. 14 Chicago Public Schools, Final Budget 2011-2012, <http:// www.cps.edu/About_CPS/Financial_information/Documents/ FY12FinalBudgetBook.pdf>. 15 Commission on Government Forecasting and Accountability, Illinois Public Retirement Systems, January 2012. <http://www.ilga.gov/commission/cgfa2006/Upload/ FY2011SmallSystemsReport.pdf>. 16 Commission on Government Forecasting and Accountability, Monthly Briefing, January 2011. <http://www.ilga.gov/ commission/cgfa2006/Upload/0111revenue.pdf>. 17 Commission on Government Forecasting and Accountability, Teachers Retirement Insurance Program and the College Insurance Program, July 2009. <http://www.ilga.gov/commission/cgfa2006/ Upload/July2009TRIP-CIPprograms.pdf>. 18 Chicago Public Schools, Final Budget 2011-2012, <http:// www.cps.edu/About_CPS/Financial_information/Documents/ FY12FinalBudgetBook.pdf>. 19 Commission on Government Forecasting and Accountability, Illinois Public Retirement Systems, January 2012. <http://www.ilga.gov/commission/cgfa2006/Upload/ FY2011SmallSystemsReport.pdf>.