There was a time when Chicago’s pension systems and the Chicago Teachers’ Pension Fund were well funded. In 2000, the municipal workers’ pension funding levels were above 90% of what was needed in assets to cover 30 years of projected pension costs. The city laborers’ fund had enough assets to cover 133% of its liabilities. Even city police pensions, which had been traditionally underfunded, hovered around 70% and were improving.
Today, none of Chicago’s employee retirement systems are better than 45% funded despite a stellar year of investment returns. There is a pathway for addressing the revenue side of the pension funding crisis in Chicago that can dramatically improve the health of the teachers and city employee pension funds.
Three critical actions must be taken: Raise funds to make up for the contribution shortfall, improve future investment returns and secure an equitable share of the state’s teacher retirement contributions.
1. Make up for the investment shortfall: The city is using revenue from its share of expiring tax increment financing districts to fund the issuance of bonds to finance Mayor Brandon Johnson’s $1.25 billion infrastructure investments initiative. The school district should use its 56% share of the revenues from those expiring TIFs to finance more than $2.7 billion in pension obligation bonds.
The revenues from bonds would immediately reduce the unfunded teachers pension liability by 17% and accelerate improvements in the financial health of the system. Even without issuing bonds, dedicating future TIF revenues would accelerate the reduction of long-term unfunded liability.
2. Reform pension investment practices: Resolving the pension funding issue must also include reforming pension fund investment practices, as past investment returns have paled compared with other systems. While recent investment results are much improved, they still fall short of other systems, as positive investment markets lift all boats. Tougher future investment environments will expose risks.
Often politicized and lacking real investment expertise, city pension fund investments have historically produced disappointing returns and sometimes scandals. The funds need to be consolidated under an independent chief investment board to oversee investments and actuarial assessments. It must have full autonomy and be free of political mandates that restrict good investments. The systems need leadership and combined risk management, which requires consolidating pension investments for cost efficiencies and ensuring the highest rate of return.
3. Fund equity for the Chicago Teachers’ Pension Fund: The passage of state education funding reform in 2017 began to address a pension system that unfairly penalized Chicagoans. Even though the Chicago and Illinois teachers pension funds are governed by state statute, there has been a vast difference in the source of funding for both pension systems. Chicago Public Schools reports that the state is set to pay $322.7 million this year for Chicago teachers pension costs, which is 32% of the total employer contribution.
By contrast, the state is projecting to contribute $6.04 billion toward employee contributions to the Illinois Teachers’ Retirement System in 2024, covering about 98% of the total employer contribution, leaving all other Illinois districts, except CPS, responsible for covering just 2% of the employer contribution to the system.
David Greising: Merging teachers’ pension funds may help increase CPS revenues
The state should bring its funding to the Chicago Teachers’ Pension Fund into parity with what it provides to the state. This would allow the property levy that is dedicated to Chicago teacher pensions, which totaled $557 million last year, to fund city employee retirement. It would also free up more than $170 million in school district revenues appropriated annually for teacher pensions. Chicago’s mayor, state lawmakers and Chicago Teachers Union leaders need to make state teacher pension funding equity their top priority. Unlike requests for more state aid, pension funding equity would not require additional contributions to other districts.
While merging the teachers’ pension funds has been discussed as a way to secure state pension funding equity, it would likely be met with opposition from downstate school districts. The state does not need teacher pension fund consolidation to summon the will to provide the Chicago Teachers’ Pension Fund a fair share of state teacher pension funding. Consolidating teachers’ pensions with the city’s police, fire and municipal employees would also immediately improve the health of the city’s pension funds, as would the consolidation of investments.
In conclusion, an infusion of funds to partially make up for the pension holidays, significant improvement in return on investments and the state’s providing of pension funding equity to Chicago teachers would significantly improve the health of the teachers and city employees pension systems. These actions would free up more than $700 million annually and reduce the size of future increases required in the employee contributions. The latter, however, is dependent on city and state continuing to fund pensions on an actuarial basis and addressing the long-term issue of cost containment.
Paul Vallas is an adviser for the Illinois Policy Institute. He has run for Chicago mayor twice and was previously budget director for the city and CEO of Chicago Public Schools.
