MEABF culpa
I’ve been thinking about the situation in Chicago, and it’s a great opportunity to meditate on how we can use this unstable moment to create structural changes to regimes in school finance that continually lead to crisis.
As a disclaimer, I haven’t worked on the ground in the organizing in Chicago, nor have I been in close/regular touch with people involved, except for one instance: I spoke with someone from CPS who got in touch with me after they heard me on Have You Heard. What I’m including here comes from my notes to prepare for that call.
The situation is changing every week, but basically, the Chicago Teachers Union spent the summer bargaining for a transformative contract amidst a budget ‘crisis’ in the city and district. This is a well-known story across the country, except in Chicago the mayor is a former teacher and teacher union organizer, someone who I supported in his election against Paul Vallas.
Yet despite ideological and political alignments across the mayor’s office, Board of Education, and union leadership, there’s still a budget crisis across the city that implicates the school district.
According to the mayor’s office, corroborated by reports I’ve seen across outlets, the crisis with the school money was created in large part by a rogue $175 million pension contribution payment.
The $222.9 million year-end projected budget deficit is driven by a decline in specific revenue streams, including the State Personal Property Replacement Tax (PPRT) and the City not receiving the budgeted $175 million reimbursement for pension contributions for Chicago Public Schools (CPS) non-teacher staff. The $982.4 million FY2025 budget forecast gap is largely driven by rising personnel, pension, and contractual costs, alongside ongoing revenue challenges.
I want to focus on those rising pension costs, specifically that $175 million number.
For a little background, former mayor Lori Lightfoot shifted the responsibility for that “non-teacher staff” pension payment locally. The pension is called the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF) and covers paras, clerks, and school assistants. Johnson wants the district to pay it too (for three years, at the lesser amount, as it could be $289 million).
There are some interesting questions about whether the city or district should be responsible for this payment under the circumstances, specifically the separation of city/district finances in the dialectic of post-centralization. I don’t have any helpful light I can shed on that issue.
What I can do is get into the weeds on the MEABF contribution situation and try to wriggle some space for thought (at least) and maneuver (at most) in what appears to be a rock and a hard place. The way to do this is by thinking creatively about discount rates and pension investment generally.
Contribution before cost: the case of discounting
Like I’ve written before, most everyone who talks about the ‘problem’ with teacher pensions talks about how much they cost, or how much more we need to fund them. I think pensions do create pressures for districts, but many of the analyses that say they cost too much are overblown. Socialists can take a different tack. I’ve come to the conclusion that rather than focusing on how much pensions cost, and reifying those costs as immutable, we should politicize how those costs get calculated in the first place. Why are the costs the way they are?
It turns out pension contribution payments didn’t just fall out of a coconut tree. They exist in the context of all that’s around them. In other words, they’re calculated by people using protocols that are actually highly speculative, contested, and contestable.
The basic technique for calculating these costs is called a “discount rate,” which is a formula for seeing what the value of something is over time. It’s called that since we can assess the value of something over time by “discounting” changes in its value as time passes. It’s like the reverse of interest rates. When we say that a dollar now is worth more in the future, we’re also saying that a dollar now is worth less in the present when seen from the future.
The pension’s discount rate calculates how much a pension fund is worth in the future. It’s typically called the “assumed rate of return,” and is set by financiers and consultants who tend to think about everything in terms of investor returns rather than justice. Their calculations tell pension managers how much the full fund is worth over decades.
This rate determines how much contribution payments should be year to year. It is ideological and should be politicized. They can reflect our values not just those of investors. (I’m going to write a post just about this soon.) Here’s what that means for Chicago.
Increase the discount rate
Marxists like to say what we do is wrest freedom from necessity (I’m pretty sure Frederic Jameson put it that way), or inject contingency and movements and flux into seemingly fixed/set realities of capitalism.
Generally, I think the discount should be politicized. In the case of the MEABF payment, last year consultants recommend a 7% discount rate for the MEABF. That’s what’s behind the $175 million. Why not get people talking about this, raise awareness that Wall Street thinking gets us to this place, not Chicago street thinking? (I get this language from Liliana Doganova’s great book Discounting the Future, which I’ll write about more in the future.)
Next, I think there are alternative proposals that are in the orbit of this insight. I can think of three, and they’re related:
First, a short-term demand would be to ask the MEABF managers change the discount rate calculation to reflect our values and lower the $170 million contribution payment. That means increasing the discount rate above 7%. I’m not sure how the calculations work, what the actual threshold would be, but I wonder what the impact of an 8-9% discount rate might be on that contribution payment.
The reasoning is that students’ families need housing now, for example, and we live in a time of great uncertainty. There’s no need to use Wall Street thinking to needlessly put ourselves into an austerity crises.
Green fiscal mutualism
But a natural critique of such a policy would be that it’s irresponsible to be so present-focused. The left would get called out for not saving for the future. To increase the discount rate is to discount the future more, which is to say, not to sock away more money for the MEABF just in case.
One counter to this accusation would be to say that things are uncertain, no one knows anything, but what we do know is that we have needs right now that would serve schools and staff better. Why starve now to feed ourselves later under conditions we actually can’t know? (Talk to the people in Asheville, NC for instance.)
But this isn’t the best framing. I’d say that we keep running into these budget crisis problems because of the larger funding structures at play in school finance. The regime that keeps pensions, for instance, invested in the stock market to get a return no matter what, rather than, say, investing in school districts themselves with state backing. We have to change the way we do things rather than reacting to every crisis every year, five years, ten years. This means making some big decisions.
Like the discount rate, for instance. I know I said we could raise that rate, but what if Chicago held public meetings about whether that rate should increase? What if it was put to a vote?
Let’s say that vote yielded the decision to increase the rate. This could be part of a larger-scale democratization of school finance in Chicago. We can think about this crisis as an opportunity to change business as usual to decrease the likelihood and severity of crises in the future. And not just budget crises, but environmental, racial, and infrastructural crises too.
In the medium-term, with an increase in the MEABF discount rate, CPS could adopt a new green fiscal mutualism that serves people before profiteers. The city and its leadership might demand that the Illinois Finance Authority derisk MEABF investment in CPS itself, focusing on green infrastructure projects for schools.
Rather than continuing to go into further debt, we use the pension fund to support the schools and vice versa rather than treating them as isolated pools of capital only ever directed by investor-type thinking. In this scheme, if MEABF returns come in below a certain threshold after investing in CPS bonds, the IFA can fill in the gap.
These are two little ideas I’ve been pondering. Again, the idea is to at least get the mind thinking a little more flexibly and creatively rather than getting stuck in a rut, but we need to change something about how we do this stuff so we don’t run into the same problems over and over again.