Chicago Public Schools faces $634 million pension fund contribution by June 30
Wow! That's a lot of money.
As the deadline looms, the Chicago Public School Teachers’ Pension & Retirement Fund expects the Chicago Public Schools Board of Education to contribute the full $634 million due before the close of its fiscal year on June 30, said Frances Radencic, director of communications of the $10.2 billion pension fund.
The pension fund “currently liquidates $60 million to $80 million per month to make pension payments to members,” said a statement on its website. “The fund cannot afford another pension ‘holiday’ or budget relief.”I would say not. When you are a pension fund manager and you are required to have the liquidity to pay out $1.3 billion in benefits payments each year, a $634 million cash contribution is rather important in order to avoid having to liquidate your investment portfolio.
And those benefits paid to retired Chicago school workers are increasing at a rapid rate.
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| Credit: Chicago Teacher's Pension Fund-2014 Annual Report |
This article caused me to look for a little context on the inner workings of the budget of the Chicago Public Schools.
It is a rather large enterprise.
Its 2015 FY budget is $5.7 billion. Those revenues are enough to put the Chicago Public Schools on the Fortune 500 if it was a corporation.
This is the breakdown of the budget. $3.9 billion is paid for salaries and benefits for 39,206 employees. That works out to almost exactly $100,000 per employee.
The CPS serves approximately 397,000 students which puts its per student costs at $14,500 per year.
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| Credit: Chicago Public Schools 2015 FY Budget |
About half of the total staff are teachers.
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| Credit: Chicago Public Schools 2015 FY Budget |
Why is the CPS in such a position on its pension contribution?
It has not been making the contributions it should have in recent years due to legislation passed by the Illinois legislature. The total shortfall in contributions from an actuarial perspective is over $1.2 billion for just the last few years. This chart shows the past contributions and the projected contributions that will be required over the next several years.
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| Credit: Chicago Public Schools 2015 FY Budget |
This chart shows the consistent underfunding of the pension fund between the actuarially required employer contributions and what was actually contributed since 2006.
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| Credit: Chicago Teacher's Pension Fund-2014 Annual Report |
This has led to a funded status on the pension fund of just 51.5% as of the most recent report.
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| Credit: Chicago Teacher's Pension Fund-2014 Annual Report |
Of course, this calculation is assuming a discount rate on the future liabilities of 7.75% which many would argue is much too high considering the low interest rate environment we are in. Using this rate, the CPS pension fund has $20 billion in liabilities and just over $10 billion in total assets. A more realistic view would probably place the future liabilities in the range of $30-$40 billion at today's rates.
Underlying all of this is a significant demographic shift as the number of active employees has fallen in the CPS while the number of retired employees has increased putting even more pressure on the pension fund, the CPS budget and the taxpayers of city of Chicago and the state of Illinois.
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| Credit: Chicago Teacher's Pension Fund-2014 Annual Report |
It is not a pretty picture.
However, it is a picture that will be painted again and again in other public sector pension plans, Social Security and Medicare if our elected leaders continue to ignore demographic and actuarial realities.
A famous Chicago pastor once said that "America's chickens are coming home to roost."
They certainly have in his home city.
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