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Since the 2008 financial crisis, state and local governments have faced significant fiscal challenges, and a few jurisdictions—Detroit, most notably—have filed for bankruptcy. Chicago has a stronger economy but faces many of the same problems that crippled Detroit. It, too, may end up in bankruptcy. But the financial crisis of the Chicago Public Schools (whose budget, as well as its taxing authority, is separate from that of the city) is more immediate, posing a threat to the welfare of 26,261 current teachers and 396,683 students.
Rising retirement costs have contributed significantly to the CPS’s budget woes. Since 2001, the CPS’s actual pension contribution—for benefits that its teachers, retired or still working, have already earned—has grown more than sevenfold, while the CPS’s revenue has grown by only about 11 percent. The growth of pension debt-service payments leaves fewer resources to pay for today’s teachers and students.
To contain exploding retirement costs, the CPS has enacted wide-ranging budgetary cuts, from textbooks to coaching stipends. Average salaries for teachers have also stagnated, and the pensions offered to new CPS teachers are worth much less (equal to a reduction of approximately 12 percent of annual pay) than those offered to new teachers only a few years ago.
The Illinois Supreme Court’s ban on benefit adjustments for current workers and retirees has severely narrowed the CPS’s options for resolving its financial crisis. Absent substantial reforms to CPS pensions, the burden of correcting the CPS’s fiscal mismanagement will fall mostly on Chicago’s teachers—and students—in the form of pay cuts, layoffs, furloughs, and other reductions to educational services.
The Chicago Public Schools (CPS) is America’s third-largest school district. Like many Midwestern urban school districts, the CPS has experienced declining enrollment, from nearly 440,000 students in 2001 to fewer than 400,000 in 2015. In the same period, the number of teachers increased, from 23,935 to 26,261, resulting in lower student-teacher ratios. As the CPS can attest, shrinking student enrollment coupled with rigid labor costs and escalating legacy pension costs can cause considerable budgetary strain.
The Chicago Teachers’ Pension Fund (CTPF) was established in 1895 and now covers more than 60,000 current and former CPS teachers. Like most other U.S. pension funds, the CTPF began the 2000s with nearly enough assets to cover the benefits already earned by workers. However, the CPS soon began taking pension-contribution “holidays”—in effect, off-book borrowing from teachers’ pensions—at the same time as the CTPF’s investment performance fell short of expectations, resulting in a nearly $2 billion asset shortfall by 2007.
The 2008 financial crisis made things worse. By 2010, the CPS had $7.4 billion in unfunded pension liabilities, with its statutory contribution per pupil more than tripling since 2001. Yet the CPS and the Illinois legislature did not respond by adopting a more responsible pension-funding strategy. Instead, during 2011–13, the CPS reduced its contributions well below the actuarially determined rates. According to the CTPF’s 2015 report, the CPS owes the fund at least $9.3 billion, with an actuarially determined 2015 contribution of $1,836 per pupil, or more than three times larger, per pupil, than that required in 2001.
Since 2001, the CPS has paid, on average, only 38 percent of its actuarially determined pension contribution. As a result, the CPS’s pension debt has grown considerably. In 2015, the CPS had total per-pupil debt of $38,657: $15,000 in general obligation debt and $23,000 in pension debt.
CPS Pension Debt, 2001-15
Source: Author’s calculations using data from the Chicago Teachers’ Pension Fund’s Comprehensive Annual Financial Reports
Adding to the CPS’s financial woes is its growing gap between revenue and outlays. During 2001–15, inflation-adjusted spending per pupil increased by 37 percent and inflation-adjusted pension contributions skyrocketed by 618 percent; but inflation-adjusted revenue rose by only 22 percent. “CPS is facing a budgetary crisis,” notes CPS CEO Forest Claypool, “due to declining state funding and exploding pension costs.”
Such data suggest that the CPS’s pension spending is crowding out spending on teachers’ salaries. For current teachers, this is undesirable for at least two reasons. The first is that teachers—as well as other workers—typically value take-home pay more highly than deferred retirement compensation. In a 2014 paper, Maria Fitzpatrick of Cornell University found that Illinois teachers value deferred retirement compensation at only one-fifth of its present value. Dedicating more of the CPS’s budget to pensions while decreasing the share devoted to salaries is therefore unlikely to be the best strategy for recruiting and retaining high-quality educators.
The second reason is that current teachers are not even benefiting from the big increase in resources devoted to pensions: the majority of the CPS’s current pension contributions are being used to pay for pension benefits that were earned in the past. (The CPS’s contribution to legacy pension costs [26 percent of payroll] is more than double the U.S. average [10.7 percent].)
In 2011, in another sign of crowd-out, the Illinois legislature implemented a less generous retirement-benefits package, “Tier II,” for new CPS teachers. Tier II pensions include a longer vesting period (ten years), later retirement eligibility, and much smaller cost-of-living adjustments in retirement. Tier II pensions represent a substantial pay cut for new teachers, too: equal to a reduction of approximately 12 percent of annual pay—or a nearly 10 percent decrease in total compensation. The CPS is also considering ending its practice of paying the employee contribution to the pension fund, currently equal to 7 percent of payroll.
The 2016 CPS budget eliminated roughly 1,400 positions, including those of some teachers. CPS CEO Forest Claypool has warned of further layoffs before the end of the 2015–16 school year. Swelling pension costs mean that the CPS’s budgetary pressures will not ease anytime soon, either—a fact aggravated by the CPS’s repeated failure to meet its actuarially recommended pension contributions and the CTPF’s (probably) unrealistic investment-return assumption.
For more than a decade, the CPS has struggled with a widening structural budget deficit. The CPS papered over its annual shortfalls by borrowing vast sums from bond markets. As a result, CPS bonds are now rated as “junk.” By failing to make the necessary contributions, the CPS has also, in effect, borrowed from the teachers’ pension fund—and so today, for every dollar of pension contributions, 80 cents goes to pay for benefits that have already been earned and only 20 cents goes to pay for retirement benefits that teachers are earning in today’s classrooms.
There are three ways to right the CPS’s sinking financial ship: secure additional revenue, reduce teachers’ retirement benefits, or cut services for current students. Start with revenue. The Illinois legislature is currently debating a bill that would change the state’s school-funding formula and provide additional state aid for operations and pension costs. Given that the legislature is mired in a long-running budget standoff, the bill’s passage seems unlikely. Raising additional local revenue faces another constraint: Chicago’s property-tax increases are capped at the rate of inflation. As for cuts to retiree benefits, the Illinois Supreme Court has prohibited pension reductions for all but future hires, thereby disallowing even the modifications to teachers’ benefits already agreed to by union leadership. For these reasons, major service cuts to Chicago’s public schools—however undesirable—appear most plausible.
Illinois governor Bruce Rauner has proposed a fourth option: allow the CPS to declare bankruptcy, a move that would require the state legislature’s approval. The alternative to bankruptcy—ad hoc, draconian service cuts and a de facto insolvency similar to that experienced by Detroit’s public schools—would be far worse for CPS students, says Rauner. Regardless of the ultimate solution, Chicago’s current students and teachers will likely suffer disproportionately as Illinois policymakers seek to fix the Windy City’s troubled finances.
Josh McGee is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
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