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Chicago Teacher’s Pension Fund

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Why Chicago Teacher’s Pension Fund CIO uses ESG investing to guide the fund’s decisions

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From The Archives: The Chicago Teachers Pension Fund Was Unfunded From The Start



Why are public pension plans so poorly funded? Sure, you can blame politicians meddling, or irresponsible benefit increases, or decisions to take contribution holidays, but, to take the Chicago Teachers Pension Fund as a case study, it was not designed to be funded in the first place.

Heres the story, as assembled from articles in the Chicago Daily Tribune from 1894 and 1895:

The Chicago teachers pension was the result of enabling legislation passed on June 1, 1895, which permitted Illinois cities with populations greater than 100,000 to set up pensions for their teachers and school employees. The legislation provided for benefits for women with more than 20 years of service and men with more than 25 years, with no minimum retirement age specified which meant that teachers as young as 38 would be eligible . However, to receive a pension was not automatic the Board of Education controlled who would and wouldnt be given the pension, either by accepting or denying requests or initiating retirements themselves. The benefit was fixed at 50% of final salary, up to a maximum of $600 , and would be funded by an employee contribution of 1% of pay, plus any fines the Board of Education might levy for neglect of duty and any donations they might receive.

it is reasonable to assume there would always be fair-minded people on the board, and, unfettered by any bias or selfish interest in the matter, they certainly would deal justly in all cases .

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Ontario Teachers Pension Plan: Asset Allocation Decision

Presentation Transcript

1. Ontario Teachers Pension Plan: Asset Allocation Decision

2. Evolving Retirement Systems The Extended FamilyWorking members share income with retireesDefined benefit pensionsWorkers accept lower salariesRetirees receive relatively fixed paymentsDefined contribution pensionsWorkers save to provide benefits for their own retirement years

3. The Extended Family Workers sacrifice consumption to provide consumption for retired ParentsBad times are shared by retirees and workersRetirees have an equity claim on economic output

4. Defined Benefit Pensions Workers sacrifice consumption through lower wages to pay for retirement benefitsRetirees are paid amounts that arefixed in currency terms, or fixed in real termsRetirees have relatively fixed claims on economic outputFormally, claims are fixedBut terms may have to be revised in adverse timesImplicit partial equity characteristics

5. Defined Contribution Pensions Worker and/or employer make contributions to a retirement accountAmount received by the worker in retirement depends onAmounts contributedActuarial factorsInvestment returns

6. The Swedish Pension System The Notional Defined Contribution System16% of salary contributedPartially fundedInvestment return based onIncrease in an index of average income, orApproximate rate of return in the systemThe Financial Defined Contribution System2.5% of salary contributedFully fundedIndividual can choose as many as 5 of 500 investment funds

There Remains A Large Disparity In How The Trs And Ctpf Are Funded By The State

Chicago Teachers

The passage of state education funding reform in 2017 began to address a pension system that unfairly penalized Chicagoans.

Even though both the CTPF and TRS are governed by state statute, there has been a vast difference in the source of funding for both pension systems. The state of Illinois is projected to pay $277.4 million in FY2022 for CTPF teacher pension costs, which represents 29 percent of the total employer contribution. On the other hand, the state is projected to contribute $5.69 billion toward the employer contribution to the TRS, which is nearly 99 percent of the total employer contribution.3

In FY2022, the states estimated contribution to TRS amounts to a pension contribution for downstate and suburban school districts of $3,667 per student, while CPS only received $814 per student . Before the state began to pick up the normal cost in FY2018, the disparity between Chicago and all other school districts in Illinois was significantly larger.

Chart 2: State Per-Pupil Contribution Disparity for Teacher Pension Funds

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Pension Contributions By The State And By Individual Employees

As the total employer contribution costs continue to increase in accordance with the actuarially required amount to reach a 90 percent funding ratio of CTPF by 2059, state contributions will shrink as a total share of the overall revenues used to cover this cost, if limited to just the normal cost and the additional 0.544 percent of payroll. In FY2022, the states contribution is projected to make up 29.4 percent of the total employer contribution, and this is scheduled to decline to 12 percent by 2059 if there is no further expansion of the CTPFs employer cost assumed by the state. The normal cost borne by the state will gradually decline as a greater share of the workforce covered by CTPF comprises Tier II teachers who are entitled to a lower level of benefits. CPS is reliant on the state continuing to add funding to the Evidence Based Funding model so that future pension costs do not prohibit us from investing in students and schools.

Chart 4: The State Share of CTPF Costs will Shrink in Future Years

At the individual level, employees covered by CTPF are required by statute to contribute 9 percent of their salary to pensions. However, from 1981 through 2017, CPS paid the first 7 percent on the employees behalf in addition to its own employer contribution. Under the 2020-24 Collective Bargaining Agreement with the Chicago Teachers Union, CPS no longer pays 7 percent for Tier II employees hired on or after January 1, 2017.

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Actual Pension Contributions Compared to Actuarially Determined Contributions

In order to analyze how far short of sufficient past years contributions have been, it is useful to compare the Districts actual contributions to an objective measure of how much it would need to contribute in order to pay off its unfunded liability over a set period of time. That measure, the Actuarially Determined Contribution , is a reporting requirement of the Governmental Accounting Standards Board and is reported in each pension funds annual actuarial reports.

The following chart compares the total actual employer contribution made by CPS and the State of Illinois to the CTPF as a percentage of payroll to the ADC as a percentage of payroll. The spread between the two amounts fell from a shortfall in FY2012 of 13.7 percentage points, or $371.4 million, during the Districts three-year pension funding holiday, to a gap of 3.7 percentage points in FY2018 due to CPS resuming pension funding, before growing again to a gap of 14.1 percentage points. In other words, to fund the pension plans at a level that would both cover normal cost and amortize the unfunded liability over 23 years, CPS and the State of Illinois would have needed to contribute an additional 14.1% of payroll, or nearly $334.0 million, in FY2021.

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In addition to the contributions shown in the chart above, CPS contributes a portion of teachers own contributions to the pension fund, known as the pension pick up. That expense is projected to total $129.8 million in FY2023 and is discussed further below.

As shown in the following chart, the year before the State started making normal cost pension payments, pensions made up $733.2 million or 13.5% of CPSs operating spending in FY2017. However, the following year that decreased to $551.4 million or 9.7% with the passage of the P-12 Evidence-Based Funding law. The percentage of the operating budget dedicated to pensions declined slowly over the next several years and in FY2023, CPSs pension contribution declined to 6.9% of the operating budget because of increases in the budget but also because the required contribution declined due to extraordinary investment returns in FY2021.

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PSRP Pre-retirement webinar from MEABF

A breakdown of the causes of the change in unfunded liability each year is available in the annual actuarial valuations of the fund. The table below summarizes the changes as calculated by the fund actuary from FY2012 to FY2021. The single largest contributor to the increase in unfunded liability is the has been changes to actuarial assumptions at $4.0 billion, followed by the consistent failure of the employer contribution to be sufficient to cover the employers normal cost for service earned that year, as well as the interest accrued on the existing unfunded liability. This deficiency in employer contributions added $3.4 billion to the unfunded liability between FY2011 and FY2021. Over the past 10 years, investment returns higher than assumed has reduced the unfunded liability by $510.0 million.

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Chicago Teachers Pension Fund

Established by the Illinois state legislature in 1895 as The Public School Teachers Pension and Retirement Fund of Chicago, CTPF is the administrator of a multi-employer defined benefit public employee retirement system providing retirement, survivor, and disability benefits for certain certified teachers and employees of the Chicago Public Schools. CTPF is administered in accordance with Illinois Compiled Statutes Chapter 40, Articles 1,17,20. CTPF is governed by a 12-member Board of Trustees six are elected by the teacher contributors, three are elected by the annuitants, one is elected by the principal contributors, and two are appointed by the employer, Board of Education.

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As recently as 2017, pension costs represented CPS greatest budgetary risk, as growing pension payments, shouldered almost entirely by Chicago taxpayers, diverted more funding each year from classrooms. Education funding reform passed that fall by the state of Illinois represented a significant step toward correcting the historical inequity thatunlike every other district in the stateburdened Chicago with the entirety of its teacher pension obligations. The structural pension funding changes included in the states education funding reform set in motion progress that reduced the districts diversion of funds eligible to support classrooms from $676 million in FY2016 to $203.5 million in the FY2022 budget.

FY2022 marks the third year that CPS will pay the City of Chicago annually for the citys coverage of CPS employees participation in the Municipal Employees Annuity and Benefit Fund of Chicago. Before FY2020, the City assumed the entirety of the payment made on behalf of CPS non-teaching employees covered by the MEABF. CPS reimbursed the City $60 million in the first two years, but will contribute $100 million to the City in FY2022.

Chart 1: Projected FY2021 Funding for Required CTPF Employer Contributions

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Things You Need To Know About Chicago Teacher Pensions

Pension holidays, steep increases in teachers’ salaries, and lopsided ratios of teacher contributions to pension payouts have caused the Chicago Teachers Pension Funds unfunded liabilities to shoot up to $9 billion in 2015.

The Chicago Teachers Union, or CTU, has threatened to strike as early as April 1 over the issue of teacher pension pickups, according to the Chicago Sun-Times. Negotiations over a new contract to replace the 2012 contract that expired in June 2015 stalled after CTU rejected the most recent offer from Chicago Public Schools, or CPS, in February. In exchange for pay increases and a moratorium on economic layoffs, among other CPS concessions, the contract would have phased out CPS practice of picking up most of the contributions teachers are required to make toward their pension fund.

After years of pension holidays, overly generous pension benefits, a lack of transparency and rampant cronyism, both the CPS system and the Chicago Teachers Pension Fund, or CTPF, are now broke.

Its been almost three and a half years since CTU members walked out on more than 350,000 students in CPS. The bitter strike lasted a full week and left the relationship between CPS administration and the union shattered.

As CTU contemplates a new teachers strike over teachers having to pay more toward their own pension benefits, here are some facts to know about CPS pensions:

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Heres How Old School Investing May Just Protect Your Retirement

Chicago Teachers

The Tribune, however, provided skeptical commentary.

It is evident that it will take some years to accumulate enough money to pay a comparatively small number of pensions. But there must be at this time a number of teachers who have served their twenty years, many of whom would be glad to retire on half pay if they had a chance. . . .

How far the board would use wisely its power to retire teachers cannot be told in advance. If the pension fund were small, as it will be for some years to come, and the number of teachers who wanted to be pensioned was large, there might be a good deal of log-rolling to get these coveted positions, where there was a steady income with nothing to do. . . .

If all the teachers were starting in fresh this 1 per cent and the money collected from other sources might make a sufficient pension fund. For there would be a great many lapses among the female teachers. Many would die and more would get married. But the proposed system will start off with numerous candidates for retiracy, and it may be that after a short time the young teachers who will have to way from fifteen to twenty years for pensions will not like to be paying out a hundredth part of their salaries for the benefit of pensioners who may live for thirty years after they have been retired.

The Tribune also published a letter from a teacher among the minority who objected:

As always, youre invited to comment at !

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Chicago Teacher’s Pension Fund Reverses Previous Decision And Endorses Investment Audit

When news came that the Chicago Teachers Pension Fund board reversed itself and recently unanimously backed an independent investment audit, the headline was somewhat shocking but so were some of the details. The headline was shocking because, among other reasons, the board and a top investment staffer are challenging Wall Streets most powerful. Even though oversight is their job, in reality, multiple incentives encourage board members and staff to ignore high-fee Wall Street behavior.

Contrast the teachers pension to the Chicago Police pension fund , where the board is aggressively challenging moves to gain transparency into fees and contractual agreements. This comes as certain disabled officers allege they are being denied needed medical treatment and funds earmarked for disabled officers are being diverted.

The Chicago teachers pension quickly did a 180-degree reverse twist to decide to examine the investment funds more closely, one that involves a high degree of difficulty when suddenly an independent audit came upon some bit of critical information. As author and academic Jeffery Hooke has chronicled in the book, The Myth of Private Equity, across the nation, the task of challenging Wall Street remains difficult because entrenched I see nothing board members may revert to their past instincts that allow for their career advancement and, as has been discovered in Philadelphia, potential exotic vacation benefits.


Paraprofessional And School Related Personnel

The Chicago Teachers Union has some 3,000 paraprofessional and school related personnel members. PSRPs range from school clerks and teacher aides to vision and hearing screeners and school community advocates. These members are essential to the functioning of our schools and often have close ties to the community from which its students are drawn.

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Questions Surround Chicago Teachers Pension Fund Long Long Overdue Forensic Investigation

Sixteen years after a forensic investigation of the Chicago teachers pension was first proposed, … the pension claims it has finally contracted for a forensic review. Whether the investigation will examine potential conflicts of interest and malfeasance regarding its investments, the pension wont say.


Sixteen years after a forensic investigation of the Chicago teachers pension was first proposed by deeply concerned trustees, as well as lauded in The New York Times NYT , the pension claims it has contracted for a forensic review. Whether the scope of the investigation will finally seek answers to longstanding trustee questions regarding potential conflicts of interest, fiduciary breaches and violations of law regarding its investments, the pension wont say.

An early 2005 New York Times article entitled, Unmasking That Pension Consultant, observed it was a mystery why public pension funds were so reluctant to investigate whether they might have been hurt by their investment consultants’ conflicted loyalties. As the article noted, the biases in these advisory firms were enough of a concern to the Securities and Exchange Commission that the regulator was conducting an industrywide investigation of pension consultants and might recommend enforcement actions against some of them.

Here’s hoping that other funds will follow the teachers’ lead, concluded Morgenson.

The teachers pension has changed investment consultants over time.

To which Holleman responded:

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