Last fall I taught a course on education law. I dug into the legal foundations of green fiscal mutualism, which is when green banks derisk pension investment in green municipal bonds(which I’ve written about here, is the kicker to my book, and actually had a tiktok go sorta viral about unexpectedly).

For the course, I recorded short lecture videos, about 20-30 minutes long, face in frame, like I’m talking on podcast. I’m pretty proud of how these came out. The themes will be related to the horizon of green fiscal mutualism, but here I’ll go deeper into the legal details of that framework using New York City as a case study.

Over the summer, I’m going to be full-time parenting our six month old Sylvan. So I’m going to share with you my lectures from the course, as well as lecture notes. This week, I’m sending along an op-ed I wrote about green fiscal mutualism for Chicago Public Schools.

Each week, I’ll also share the readings I’d assigned and that I deal with in the lecture videos in case you want to read along.

This week, I’m sharing the first introductory video here. I go into the basics of green fiscal mutualism, and map out the law I’ll be covering over the next few weeks.

Here are the readings I assigned, which, for the first week’s lecture, are below:

Dixon, Lauren F., and Tom Woelfel.(2017). “The Pursuit of Financial Return and Societal Benefit: An Examination of Pension Fund Economically Targeted Investments.” Pacific Community Ventures, June 2017. https://www.pacificcommunityventures.org/2017/06/14/economically-targeted-investments-u-s-pension-funds/

Backer, D. I. (2025). “To fix school funding, Chicago must rethink pension investing.” Crain’s Chicago Business. URL: https://archive.is/BUZwE#selection-1935.17-1935.79, PDF.

Glass, M. R., & Vanatta, S. H. (2021). The frail bonds of liberalism: Pensions, schools, and the unraveling of fiscal mutualism in postwar New York. Capitalism: A Journal of History and Economics, 2(2), 427-472.

NYC Comptroller site. “Economically Targeted Investments.” Government web site. Accessed October 1, 2024 https://comptroller.nyc.gov/services/financial-matters/pension/responsible-investing/economically-targeted-investments

Investing for the Common Good

Opinion: To fix school funding, Chicago must rethink pension investing

Chicago is at a major crossroads. It’s almost unprecedented. To see it, we have to dive into wonky details about the choices facing leaders of Chicago’s municipal governments, specifically pension funds. These choices contain the seeds of a radically new and better political-economic future or a continued slide into the abyss of our current moment.

As always, it’s investment or barbarism: Wall Street values or the people’s values. We need to start challenging the logic entrenched in pension management.

Here’s what we know.

As federal pandemic relief dries up, the city of Chicago and Chicago Public Schools are projecting deficits over the next couple of years of approximately $1 billion and half a billion annually, respectively.

The Chicago Teachers’ Pension Fund had $13.8 billion in unfunded actuarial liabilities in 2023. In total, all four of the city pension funds had $33.9 billion in unfunded liabilities — equaling the worst funding ratio of any pension plans in the country. In the past, moments of crisis have created opportunities for Wall Street players to swoop in with solutions aimed at maximizing profit for the ultra-wealthy while residents are left with austerity budgets, particularly as Trump’s tariff crisis sweeps through markets.

Some background: Following the Great Recession, toxic interest-rate swap deals drained millions of dollars from the city, state and Chicago Public Schools. This corporate greed tanked the economy and produced losses for the pensions. Additionally, the state’s decision to allow the city to lower its contribution to the pensions caused the fiscal crisis we currently find ourselves in.

Currently, the city of Chicago and Chicago Public Schools pay $1.39 billion and $519 million in annual interest payments to Wall Street, respectively. In other words, the city and CPS’ annual projected budget deficits would not exist if it wasn’t saddled with predatory interest payments to Wall Street.

As varying strategies emerge to close the budget gap over the next several years, we want to explore alternatives to Wall Street’s tired playbook and figure out ways to de-risk local pension funds investing directly in municipal bonds.

Fiscal mutualism is an economic concept where pension funds invest in municipal bonds issued by local governments. This helps lower borrowing costs for those governments, making it easier for them to finance public projects without relying on extractive practices from Wall Street.

By having a pension fund invest in their bonds, the city can secure lower interest rates on their debt and the pension fund earns a steady return on its investment. Fiscal mutualism defined the first half of the 20th century, with virtually every state restricting pension investments to federal, state and local bonds.

This closed loop created a symbiotic relationship where pension trustees were invested in the stability and growth of their city and schools by purchasing bonds, and in return, the city or school district made interest payments that directly benefited the retirement of its workforce. For example, under this system, the interest that CPS would pay on the debt would go towards reducing CPS' own pension liability because the pension fund would be receiving the interest payment, making it a double-winner for CPS.

Between 1942 and 1957, municipal bonds dropped from making up 70% of pension investments to only 19%. Tax-exempt municipal bonds generally offer lower yields than corporate securities, but wealthy investors accept the lower yield in order to receive the tax benefit.

CTPF online archives show that the pension has bought up tax anticipation notes from the Chicago Board of Education in the past, helping the district with its cash flow.

Since pensions don’t pay taxes, the calculus of fiscal mutualism eroded after higher interest rates widened the yield gap between government and corporate securities and the desire for higher returns overruled the desire for stability.

This shift left local governments with higher interest rates to Wall Street siphoning larger portions of their budgets annually, eroding the ability to provide adequate public services or meet their pension obligation.

Currently, pension funds pursue investment vehicles that get them closer to an 8% return, rather than the 3%-5% currently offered by the municipal bond market. Thus, in order to return to the symbiotic relationship of fiscal mutualism, we need to explore mechanisms to make municipal bonds attractive for local pensions.

We must oppose austerity and promote fiscal mutualism as an approach. We’re at a crossroads, particularly when we consider the other options in front of us. On the one hand, the Satoshi Action Fund is helping states like Arizona and Missouri write legislation requiring pensions to buy cryptocurrency exchange-traded funds, and Wisconsin and Michigan have already made these trades.

Instead of boosting the bitcoin grift, we can push our state financing authorities to de-risk pension investment in school infrastructure itself.