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October 2017 | In 1995 Chicago got the ability to redirect the pension tax revenue of the Chicago Public Schools to the CPS general fund. Be careful what you wish for . . .

To understand why Chicago needed the approval of the Illinois legislature to increase its tax levy to fund pensions of the Chicago Public Schools, one has to go through 30 years of history of management of the CPS. Here is the timeline:

1981 The Chicago Board of Education agrees to pick up employee pension contributions in exchange for a no salary hike agreement with the Chicago Teachers’ Union (7% of salary). Jane Byrne was the mayor.
1987 Mayor Harold Washington convenes an Education Summit after a 19 day school strike.
1988 The School Reform Act is passed, creating Local School Councils with the power to govern individual schools.
1988-1994 Lax budgetary oversight leads to a financial meltdown at the CPS.
1995

The School Reform Act is amended by the 1995 Amendatory Act.

The School Finance Authority is abolished and Chicago’s mayor is given the power to appoint the CPS board and CEO.

Tax money (including money previously earmarked for pensions) is consolidated into the CPS general operating fund. The idea was to give the CPS more financial flexibility in determining spending priorities.

The Chicago Teachers Union is stripped of certain collective bargaining rights. (Section 4.5 of the Illinois Labor Relations lists permitted subjects of collective bargaining. It’s a very short list.)

1997 The Illinois legislature makes permanent Chicago’s ability to divert pension tax dollars to the CPS operating fund. (This was due to sunset in 1999.)
1997-2004 CPS contributions to the Chicago Teachers’ Pension Fund are reduced to a trickle (average $13.5 million/year).
1998-2014 Average annual reported salaries of CPS pension fund participants increase from $41,118 to $72,852 (+77%).
2006-2010 CPS pension contributions pick up, increasing from $53 million in 2006 to $291 million in 2010.
2011 CPS negotiates a partial pension holiday with the State of Illinois.
2011-2013 CPS pension contributions are scaled back (average $142 million/year).
2014-2015 CPS starts to address the pension underfunding issue, increasing contributions to $534 million in 2014 and $634 million in 2015.
2016 The State of Illinois takes away Chicago’s right to redirect real estate tax revenue away from the Chicago Teachers’ Pension Fund, effective June 1, 2017.

Restrictions on the use of tax revenue

Taxing districts usually have separate accounts for various purposes into which specified amounts are deposited. State laws that govern each type of taxing district generally provide what accounts a taxing district may have (e.g., a corporate fund, a bonds and interest fund, and other specialized funds, such as a fire protection fund, a library fund, or a street and bridge fund) and give direction about how the money may be spent. (Illinois Department of Revenue, “The Illinois Property Tax System”, page 18)

If you look at a DuPage county real estate tax bill for Hinsdale, there are 13 taxing districts and separate tax levies for pensions for 9 of those districts. A City of Chicago bill shows 12 taxing districts and separate tax levies for 5 of those districts (but not for the Board of Education).

The 1995 Amendatory Act was enacted to permit Chicago to do an end run around the requirement to use real estate tax revenue to fund the Chicago teachers’ pensions.

What went wrong

From 1996 through 2000, the diversion of pension funding to the CPS general fund appeared to be benign. The bubble in tech stocks was going on, and investment returns masked the absence of contributions to the pension fund.

The 2000-2002 bear market in stocks caused a massive underfunding problem, but CPS did not react by resuming pension contributions. By the end of 2005, the pension fund was under 80% funded, down from 96% in 2000.

The financial crisis of 2008 simply put the underfunding problem over the top. The funding ratio fell from 78% in 2008 to 65% in 2010. Despite the increase in underfunding, the CPS sought and obtained a three-year partial pension holiday from the State of Illinois. (If this were Watergate, the State would have been labeled an unindicted co-conspirator.)

The bottom line . . . It’s easy to raid the cookie jar. It’s not easy to have the discipline to restock it.

The real downside of the 1995 Amendatory Act was that it allowed out of sight deficit spending. Public pension plans always need to make contributions as a cushion for the inevitable bear market. Skipping 10 years of contributions and expecting to have a functioning plan is an exercise in self-delusion. The annual pension cost was always there. It was ignored due to the city’s ability to hide the pension underfunding situation as footnotes to the financial statements. (The business of hiding government liabilities off balance sheet ended with the adoption of GASB 67 and 68, effective for fiscal years after June 15, 2015.)

The end game – adult supervision

In 2016 the City of Chicago needed to go back to the State for an authorization to increase the pension levy. (That would be the same levy that is not subject to restrictions on increases under the city code.) The quid pro quo for the tax increase (and other potential state funding) is the loss of the power to divert real estate taxes earmarked for CPS pensions to the CPS general fund. See Public Act 099-0521.

At the end of the day, the things that remain from the 1995 Amendatory Act are the mayor’s authority to appoint the CPS CEO and board, and restrictions on Chicago Teachers’ Union’s collective bargaining rights.

The most bizarre aspect of all this is that adult supervision is being administered by the State of Illinois, which has a long history of mismanaging pensions and has a backlog of $16 billion of unpaid bills./p>T

Additional reading

Illinois lawmakers gave Chicago’s mayor the freedom to ruin school finances (Heather Gillers, Chicago Tribune, August 22, 2015)
http://www.chicagotribune.com/news/watchdog/ct-cps-budget-crisis-met-20150821-story.html

CPS pensions: From retirement security to political slush fund (Ted Dombrowski and John Klinger, Illinois Policy Institute)
https://www.illinoispolicy.org/reports/cps-pensions-from-retirement-security-to-political-slush-fund/

The Center Holds (on to the power): Chicago School Reform since the 1980s (Maureen Kelleher, newstpes.org, January 2008)
http://www.newstips.org/briefing-papers/the-center-holds-on-to-the-power-chicago-school-reform-since-the-1980s/

Here’s why Chicago Teachers’ Pension Fund is in meltdown (Greg Hinz, Crain’s Chicago Business, November 29, 2012)
http://www.chicagobusiness.com/article/20121129/BLOGS02/121129786/heres-why-chicago-teachers-pension-fund-is-in-meltdown

Illinois Labor Relations Act, section 4.5
http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=1177&ChapterID=19

The Illinois Property Tax System (Illinois Department of Revenue)
http://tax.illinois.gov/Publications/LocalGovernment/PTAX1004.pdf

Public Act 100-0465
http://www.ilga.gov/legislation/publicacts/100/PDF/100-0465.pdf

State and local government pensions at the crossroads (Craig Foltin and Dal Fleshner, The CPA Journal, May 8, 2017)
https://www.cpajournal.com/2017/05/08/state-local-government-pensions-crossroads/