Chicago Punts on its Looming Teacher Pension Disaster

Chicago Punts on its Looming Teacher Pension Disaster

After two weeks of strikes, the Chicago Teachers Union (CTU) reached a deal with Chicago Public Schools (CPS) to return to the classroom. The agreement addresses issues that brought the strike to a head: a pledge for higher pay, smaller class sizes, and more support staff, among other things. However, it failed to address a crucial component that set the stage for this strike, and will again for the next one: the city’s catastrophic teacher pension funding crisis.

Chicago’s teacher pension system is facing an astounding $11 billion shortfall. CPS’s annual budget, for comparison, is $6 billion. In other words — assuming Chicago could magically cancel all its existing contracts and all other financial commitments — the district could totally shut down its school system tomorrow and still take two years to meet their pension commitments.

There are a number of reasons the city’s pension fund has cratered. The big one is the “pension holiday” the state gave the city back in 1995. And take a holiday, Chicago did. They skipped payments to the pension system every year from 1995 to 2005, turning a fully funded system into a system with a $3 billion shortfall. Since then, pension shortfalls skyrocketed to $11 billion, driven in part by the miniscule contributions teachers themselves are required to make (2 percent of salary, compared to a private sector social security average of 6 percent). All this means that Chicago pays 27 percent of each teacher’s salary toward the city pension fund, just to stave off a total collapse.

The catch is that pension debt doesn’t only cost the taxpayer — it comes at a real, if hidden, cost to the average teacher. After all, every dollar spent paying interest on debt is a dollar that can’t be spent giving teachers a raise. In Illinois in general, Bellwether Education Partners’ Chad Aldeman calculated that every teacher could be given a raise of $15,373 if not for pension debt.

One would think a Chicago teacher strike is an ideal moment to rethink teacher retirement systems, to ensure the system gets on a path to a secure financial footing for both teachers and taxpayers. Chicago, apparently, doesn’t think so. The labor deal has no reported provisions to address the looming pension debt crisis. The absence of any sort of effort to rethink pension funding is nothing short of irresponsible.

Chicago’s failure to consider pensions is especially stark in light of all the details they did discuss. For example, the district and union apparently felt it essential to negotiate longevity pay for bus aides, hiring restorative justice coordinators at high-need schools, and creating sanctuary schools that are off-limits from federal immigration officers. And they almost stalled the deal over whether to make up a couple of weeks of school missed due the strike. Meanwhile, handling pension debt and putting the school district on a fiscally sustainable path apparently didn’t merit consideration.

But the craziest part isn’t that Chicago’s labor deal doesn’t address the pension crisis, it’s that the deal will actually make the pension crisis worse. The settlement will make Chicago teacher compensation — already among the highest in the nation — 16 percent higher over five years, raising average teacher salaries to nearly $100,000. (By contrast, the median Chicago household who will fund these raises makes $52,000.) Since Chicago, like other school districts, pays out pensions based on a teacher’s years of experience and salary, the higher the salary, the higher the city’s pension commitment. So Chicago’s deal to increase salaries will launch pension shortfalls higher than ever.

We’ve seen this movie before. When the state allowed Chicago to skip pension payments in 1995 to 2005, where did the city divert that “extra” funding? Among other places, to salary increases for teachers. This had predictable effects. As Illinois Policy relates, “Because salaries determine future pensions, the pay increases helped boost benefits at the unsustainable growth rate of 6 percent annually over a 17-year period. Had pension benefits grown at a more modest rate, the pension shortfall would be $4 billion to $6 billion less” — in other words, about half what it is now.

All this adds up to a textbook case of public policy malpractice: Over 25 years, Chicago turned a fully funded program into an $11 billion deficit by simultaneously under-funding their pension commitments and boosting salaries. The strike’s solution not only ignores the pension crisis eating up the dollars that might have gone to salaries, but it makes the problem worse without addressing a root cause of CPS’s financial distress. They have all but assured the next CTU strike will hit a Chicago with even fewer resources to address it. The first law of holes states: If you’re in a hole, stop digging. When it comes to pensions, Chicago just decided to keep digging and keep ignoring the hole they are in. 

Nat Malkus is the deputy director of education policy studies at the American Enterprise Institute. RJ Martin is a research associate at AEI.

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