Chicago Public Schools’ huge pension debt just got $1 billion deeper, new estimates show

March 27--Less aggressive investment return estimates have carved an additional $1 billion hole in the severely underfunded pension system for Chicago teachers, reviving questions about how a retirement plan for tens of thousands of public workers can survive without additional money from taxpayers.

Consultants for the Chicago Teachers' Pension Fund now conclude the system is about $11 billion in the red and faces an even steeper climb to comply with a state law that requires it to be 90 percent funded by 2059, financial documents show.

Schools and households won't feel the worst pain of the impending pension payment spike for several years. Experts say that's because the state-mandated payment plan pushes an enormous and growing burden onto future taxpayers.

Other distressed Chicago and Illinois public pension funds face similar pressures, with still no hint of where the money will come from to bring them into shape, raising the prospect of future tax hikes and budget cuts.

"We are aware of our obligations, and we will continue to meet our obligations for all of the pensions. But I think the biggest plan is to continue to lobby for additional funding to support our schools," Chicago Public Schools CEO Janice Jackson said recently when asked about the escalating pension costs.

For many years, CPS deferred much of its required annual pension payments through a deal with the state. That depleted a once-healthy fund, and since the so-called pension holiday ended, the district has had to pay mounting annual sums in an effort to catch up. Last year, the district took on costly short-term loans to help cover a $700 million-plus contribution to the fund.

The district's obligation eased last year when the state agreed to take on hundreds of millions of dollars' worth of CPS pension payments. That agreement will cost the state about $230 million next year. The district's share will amount to more than $550 million.

The state's agreement to pick up some pension costs, along with city property tax hikes earmarked for pensions, allowed school officials to present a picture of relative fiscal stability.

Republican Gov. Bruce Rauner's latest spending plan, however, now wants to cut off the pension aid. And under the state payment plan, the pension fund costs will skyrocket in years to come. By 2026, under the pension fund's latest projections, the annual payment to the fund will be roughly $1 billion.

"The fact that you're underpaying now means you have to pay much more later, because you are deferring contributions so far into the future," said Lance Weiss, a senior consultant with the Gabriel, Roeder, Smith & Company firm that now advises the city's teacher pension fund.

Despite the pension fund's revised projections, Executive Director Charles Burbridge said the district will ultimately resolve its pension problems if the economy and investment income grow.

"You may debate about the quality of the plan. But this plan, if it's well executed, works. Which is better than a better plan that's not executed," Burbridge said. "Thinking that there's some magic bullet that's going to make this disappear, I don't think is realistic."

The pension fund's latest estimates are embedded in complex accounting reports, and came about after a fiscal tug of war between fund officials, their financial consultants and the state's auditor general.

The result was a series of subtle tweaks to critical fund investment assumptions that affect the estimated amount of cash the system needs to pay future retirees.

Pension systems across the country use the same practices to get updated funding estimates that are better informed by economic trends.

Fund administrators invest pension contributions from employees and employers into markets such as stocks or real estate. Financial experts then make detailed assumptions about the future -- including when pensioners will retire or die, and how well a fund's investments may perform based on market conditions -- to determine how much money a pension system needs.

Pension funds rely heavily on market performance: Investment earnings account for a majority of public pension financing, according to the National Association of State Retirement Administrators.

That means adjustments to a pension fund's projected investment returns have an outsized effect on the estimated amount of money needed to keep the fund in shape.

Other factors also come into play, such as how much wages will grow, staffing levels and inflation. But investment returns have an especially powerful impact on a pension fund's health -- an economic downturn can expand the shortfall, and a boom can do just the opposite.

"When you reduce your anticipated rate of return, you've increased your cost to taxpayers, no question," said Ralph Martire of the Center for Tax and Budget Accountability.

In the case of the city's teacher pension fund, a half-percentage point reduction to its estimated investment return rate and a series of other subdued forecasts led to a dimmer outlook.

"Under this new approach, it is being assumed that the capital markets are going to do less of the lifting to bring the fund to its targeted funding level, and that means government contributions will have to be proportionately more," said Thomas Aaron, an analyst with Moody's Investor's Service. "Ultimately the actual investment performance is what's going to determine it."

Ballooning pension costs have already strained school coffers, but still were not enough to keep the district's unpaid retirement debts from growing. By this summer, the pension fund estimated its assets cover only half of the benefits its members have earned.

Those trends continue to pose questions about how CPS will manage to absorb its pension debts while investing in education.

"What you're going to end up doing is diverting money that was initially intended to be operating revenue to educate kids to pay for what you didn't put into your pension system in the past," Martire said. "That's going to be what happens, because there's no way out of making the pension payment. Our state constitution is very clear."

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