Set the Record Straight
on Teachers
Pension fund Problems
Pension fund Problems
By Kevin B. Huber
Catalyst.com
|
CTPF Executive Director
Kevin B. Huber
|
The Chicago Teachers'
Pension Fund found itself at the center of controversy in recent days as
dramatic headlines blamed pension payments for the Chicago Public Schools'
budget shortfall and the subsequent layoff of thousands of employees. Dramatic
headlines may grab attention, but they obscure the truth. It's time to set the
record straight and ask CPS to accept responsibility for past mistakes - so
that they are not repeated.
CTPF is a $9.5 billion
pension plan that serves 60,000 teachers, administrators, and retirees of the
CPS, including charter schools. Our members do not contribute to or receive
Social Security, so their pension is their primary retirement security. All
teachers are required to live in the city. More than 85 percent of CTPF beneficiaries
live in Illinois, and 50 percent of these beneficiaries continue to live in the
City of Chicago. CTPF benefit payments generate more than $1.5 billion in
economic impact for Illinois and help create more than 11,500 jobs.
Our teachers have pensions
for a reason - they provide stable retirements at less cost than other
retirement programs. The pension equation is a simple one, which works when all
sides are in balance. Teachers and employers contribute revenue, and our fund
invests revenue and pays benefits. CTPF has invested prudently and has a
30-year rate of return of more than 8 percent. Our members have never missed a
pension payment, investing 9 percent of their salary from each paycheck toward
retirement.
CTPF currently owes members
about $17 billion in future pension costs. With $9.5 billion in the bank,
it means we have about 54 cents for every dollar we owe. As recently as 2001,
CTPF had more than $1 in assets for every $1 it owed.
So how did the equation
fall out of balance?
Diverting Pension Funds
To understand this we need
to examine the critical component of the pension equation - revenue. From the
late 1920s until 1995, CTPF received a dedicated property tax revenue from the
citizens of Chicago. CPS didn't have a pension payment. CTPF invested the tax
revenue and created one of the strongest retirement funds in the state.
Facing a budget crisis in
1995, CPS convinced the Illinois legislature to divert the dedicated CTPF levy
into the CPS operating budget. Removing that guaranteed revenue source,
however, fundamentally changed the structure of our fund and knocked the
pension equation out of balance.
What happened next is the
little-known yet critical part of our story. Instead of making the
"normal" cost of pension payments, CPS used the money that would have
gone to pensions for other purposes. For a period of 10 years, 1996-2005,
CTPF received no employer contributions.
Professional actuaries have
determined the amount that the employer should have contributed during those years
totaled more than $2 billion.
Even with the strong
investment returns CTPF earns, a fund cannot survive without stable revenue.
When our funded ratio fell below 90 percent in 2006, CPS was forced to make
payments for the first time in a decade. Instead of taking responsibility and
paying the bills, CPS returned to Springfield in 2010, asking to reduce
payments through a euphemism called a pension "holiday." Legislation
passed in 2010 allowed CPS to pay less than they owed, underfunding pensions by
an additional $1.2 billion for three years from 2011-2013.
With the
"holiday" ending in 2013, CPS returned to the Illinois legislature on May
31 to ask for an additional $350 million in relief. The measure failed,
but no other solution was offered.
Call it a holiday or
relief, but these euphemisms really meant that CTPF didn't receive enough money
to keep the pension equation in balance.
Sadly, the State of
Illinois also has failed CTPF. When CTPF lost the tax levy in 1995, the
state agreed in principle to support CTPF at a rate proportional to the
downstate teachers - but that funding failed to materialize. Instead, state
funding for CTPF has fallen dramatically.
In 1995, we received about
23 percent of the funding provided to the Teachers' Retirement System of the
State of Illinois. Today, we receive less than 1 percent - even though we
have 18 percent of the state's teachers. Funding promised from the state should
have amounted to about $2.7 billion since 1995. Chicago's taxpayers continue to
fund downstate and suburban pensions, yet the state has failed to support
Chicago's teachers.
So what can we do? Much of the focus on pension funds has been on so called
benefit reform - meaning the call has been to reduce benefits for members. Yet
excessive benefits did not bring us to this point - a lack of revenue did. The
CTPF Board of Trustees has taken the position that revenue reform must occur
before benefit reform.
We have seen the damage
that a lack of revenue has done to our fund, and we need to remedy the
situation.
Revenue reform could follow
many paths, including increasing taxes, restoring our dedicated tax levy,
refinancing the pension debt, or eliminating funding schemes that have caused
artificially lower historical payments. The employees, employer, retirees and
state must work together to come up with a plan that will stabilize CTPF.
CTPF has done - and
continues to do - its part to solve the pension problem. We have acted
cautiously and invested prudently. We have built a diversified investment
portfolio which has exceeded our expected rate of return, but we can't invest
our way to financial security. We need revenue.
We know that excessive
benefits didn't cause this problem, and cutting benefits alone won't solve it.
We need to balance the pension equation and only responsible action from the
employer can accomplish this. Teachers have looked at the past and learned
difficult lessons. We hope CPS will do the same.
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