Chicago Teachers’ Pension Fund: Nearly $200 in Payouts for Every $1 Earnings

06/09/2017 05:33 pm ET

In 2016, Chicago Teachers’ Pension Fund (CTPF) paid out $1.5 billion in benefits while earning only $7.8 million on investments. Yes, the fund disbursed nearly $200 in benefits for every $1 in investment earnings. Red ink created by decades of fiscal mismanagement threatens students and taxpayers. And the shortfall calls into questions whether CTPF can support the 30,910 current Chicago Public School (CPS) teachers when they retire.

What would happen to a business if they were spending more than they were making for multiple years in a row? The business, unable to pay their employees among other expenses, would be forced to close. Similarly, shortfalls in the pension fund force Chicago Public Schools to divert money from business operations (teaching students) to pension payments—payments which should have been made from investment earnings.

Although teachers contribute 9 percent of their salaries each year to the pension fund (2 percent paid for by the teachers and 7 percent covered by CPS), the government rarely makes the additional payments required on their end to make the system solvent. Politicians strengthen their support from teachers by promising them generous pension payouts. By refusing to fund the pension plan in a manner sufficient to ensure adequate investment revenue to fulfill those promises, taxpayers don’t immediately feel the burden of these promises. Actually funding these plans would have required higher taxes or diminished services; the loss of taxpayer support would likely have outweighed the political benefit of the generous pension promises.

But now, after decades of this charade, taxpayers are feeling the burden of making up the pension fund shortfalls for current retirees. Students are suffering, as relatively fewer teachers can be hired. And the retirements of future retirees are threatened. Chicago continues to lose residents—losing 11,324 in 2015 and another 19,570 in 2016. The spiral of higher taxes and opportunity decline threatens to spiral down, evidenced by calls from the Chicago Teachers Union and numerous aldermen for a per-employee tax on larger corporations, a siphoning of money from special taxing districts and a “LaSalle Street Tax” on financial transactions conducted on Chicago trading exchanges.

The $9.5 billion question is: How did the CTPF end up in this dilemma? The seeds for the crisis were sown in 1995 with a “pension contribution holiday” enacted by CPS officials. Pension contributions were funneled towards school operations—particularly salaries—rather than shoring up pension plans. By 2006, the system suffered from $3.1 billion in unfunded liabilities—a drastic turnaround from fully funded status in 1999. Despite this result, officials declared another pension holiday in 2010, funneling billions of dollars away from pension funds once again. These previous actions have forced the CTPF to take the contributions of taxpayers and CPS employees and put them directly into the fund to pay expenses of current beneficiaries instead of investing those contributions to create revenue. In terms of reform and solutions, the Board of Education approved a plan to borrow $389 million, which will help contribute to the pension fund. After applying this short-term Band-Aid, CPS will still owe $700 million to the CTPF. This short-term plan has a goal to keep classes open and to help make pension payments, however, it is unclear how much of the loan will go to each section. The $716 million pension payment is due June 30 and will be paid for with a combination of the borrowed money and about $250 million from a new property tax.

A big step in the right direction is to detach pension funds from political manipulation. One potential remedy is to explore transitioning from a defined benefit to a 401(k) style defined contribution plan based on the American Legislative Exchange Council’s (ALEC) State Solutions for Government Pension Reform. For example, Michigan’s State Legislature introduced a bill that would close the state’s defined benefit pension system (with a $29 billion unfunded liability) to new hires; new teachers would be enrolled into a 401(k) style plan in an attempt to help eliminate their $29 billion unfunded liability. An even more impressive Michigan story is the pension reform of the late 1990s which enrolled all new employees in a defined-contribution retirement plan rather than the traditional pension plan. Without this reform, unfunded liabilities in the Michigan pension system would have been between $2.3 billion and $4.3 billion higher.

As of right now, it appears the CTPF are only focused on temporarily patching up the hole and have not been thinking about a long-term solution. Borrowing the money only puts them in more debt; CTPF takes one step forward and then two steps back.

Megan DeGrafft assisted in the writing of this article.

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