The History of CPS Pensions

At the Wall Street Journal Alyssia Finley recounts the history of Chicago Public School pensions:

In 1995, amid financial duress, the state established a block grant to help Chicago pay for special education, transportation and nutrition programs. In 2017, Chicago schools benefited to the tune of $250 million. As part of the deal, the state handed control over Chicago teacher pensions to then-Mayor Richard Daley, who took a 10-year “holiday” from payments. According to the Illinois Policy Institute, this allowed the district to divert more than $1.5 billion from teacher pensions to pay and other perks.

In 2011 Chicago suspended pension payments again for three years to prevent massive teacher layoffs and benefit reductions. After teachers went on strike for seven days in 2012, the district awarded the union a 17.6% pay increase over four years.

A few years later, facing a $1.1 billion structural deficit, the Chicago Board of Education approved $1 billion in borrowing. Last summer, the district increased property taxes by $250 million to make an obligatory pension payment, but later agreed to a new contract boosting teacher salaries by 4.5%. Now pensions are underfunded by $11 billion.

Mindful of the investment risk, creditors are charging junk-rated Chicago schools a premium to borrow. To pay its bills the district borrowed $725 million at an 8.5% interest rate in March and another $387 million at 6.4% in June. In July the school district issued $500 million more in debt at a rate of about 7.25% to repay creditors. The Chicago Board of Education is counting on a state bailout to repay all of this debt.

Meanwhile, student enrollment is plummeting, and not only because more kids are attending charter schools. Crime, high property taxes and lousy schools—only a quarter of eighth-graders scored proficient in math on the National Assessment of Educational Progress—are to blame for an exodus of black families. According to the U.S. Census Bureau, Chicago was the only major city to lose population in 2015-16.

While the status quo is unsustainable, the Chicago Teachers Union has demanded that state lawmakers hike property and business taxes to pay for their pensions. But even the union seems to realize that it has overplayed its hand. See its press release this week charging that “Mayor Rahm Emanuel and Gov. Bruce Rauner are knowingly sabotaging Chicago’s public schools” and “supporting a plan that will give money to private schools that could be directed to our public school classrooms.”

Let that sink in for a while. Chicago suspended payments to the CPS pension fund for 13 of the last 22 years, using the money to pay for raises instead which further exacerbated the pension problem.

In the column Ms. Finley is hailing Illinois Gov. Bruce Rauner’s offer for the state to provide a temporary bailout to the CPS pension fund in exchange for implementing a voucher system:

Illinois sources say a deal supported by legislative leaders could be announced this weekend that will provide $100 million in tax-credit scholarships for low-income kids. This would represent the biggest first-year scholarship funding among any tax-credit program in the country. Each scholarship would be worth up to $12,280—roughly equal to Illinois’s average per-pupil funding. Special-needs students could receive more. Families with incomes up to 300% of the poverty line would be eligible, but lower-income kids and those attending failing schools would have priority.

The problems I see with this are many. The state doesn’t have the money to shore up the CPS’s pensions system; the city doesn’t have the money to implement the voucher system. Implementing either would require borrowing at the high rates that result from their poor credit ratings or raising taxes which would further erode their ability to pay.

I guess I shouldn’t worry about the plan going through since Illinois’s legislature, securely in the hands of Democrats, probably won’t allow the plan to go through. Ilinois House Speaker Mike Madigan has steadfastly refused to throw a bone to the CPS so far. After all, what’s in it for him?