Underfunded by design
Late last year I did a mini-project on teacher pensions. I wanted to understand what their deal was. I ended up concluding that project with a proposal for the federal government to derisk green school infrastructure investment for teacher pensions by providing compensation for any losses pensions incur when buying school district bonds, further incentivizing the purchase of low-rated and green bonds.
But there were some materials I didn't get to write about that I thought were really interesting and this week I wanted to summarize some insights from one of them: the inimitable Amanda Kass's recent blog posts on Chicago pensions, the first of which focused on the Teachers' Pension Fund there.
Overall, what's great about Kass's post is that it structuralizes and historicizes teacher pensions in a way that's like opening a window in a stifling room. If you pay attention to discourse about teacher pensions, you probably get a healthy dose of hot air coming from rightwingers and neoliberals who want to make them into 401k's or, maybe more subtly, from unions who keep doing what's easiest, even though it hurts their members: increasing costs, creating tiers for age thresholds, tinkering with vestiture, etc.
In this hot air, Illinois stands out as a paradigm case for the rightwingers and other critics of public pensions. They say there's a huge crisis, that Illinois is awful, etc. But Kass, using a structural and historical policy analysis approach, shows that the status of Chicago's teacher pension is the result of specific decisions made by specific individuals that created the status quo.
Kass first shines a light on the apparatus that governs the pension, noting that "the Chicago Board of Education (not the City of Chicago) is responsible" for the teachers' pension. Then she clarifies that the CBE's annual contributions to the pension fund is dictated by state law, not a policy that the board decides for itself. This means that "changing the funding laws requires action by the General Assembly and Governor."
Specifically, it's the state's job to make sure that the CBE contributes enough to get the pension 90% funded by the end of fiscal year 2059. But the pension fund is only 46.8% funded right now. Why? Kass says there are a lot of factors.
There's the Great Recession of course, which led to huge investment losses. Investments are at least half the game of pensions, since how much you can make when investing your fund determines whether you've got enough to pay for members' retirements. But the other half of the pensions game are contributions: how much is put into the fund every year.
It turns out that the CBE has been making insufficient contributions to the pension fund. But this wasn't some accident. Kass claims that the CBE underfunded the pension "by design." Here's where the history comes in.
Between 1997-2002 the pension fund was 100% funded. What happened? Was the teacher pension previously a market-efficient defined contribution policy that was made into a wasteful social-democratic program? No! It was 100% funded and social-democratic. And was ruined.
In an authoritarian neoliberal pique that took cities by storm, many school boards were dissolved and big city districts were turned over to mayoral control. Chicago was ground zero for this shift. But when the schools were centralized in 1995, "state lawmakers didn't also provide the district with increased revenue." Instead, the law consolidated the district's property taxes into a single stream, making it more "flexible," but in the process it eliminated a specific tax whose revenues went to the pension fund.
These geniuses didn't just remove the pension's dedicated revenue stream. They also put the contributions schedule in line with the other state pension plans, not taking into account the specific needs of the teacher pension, which led, according to one state representative who opposed the change, "the stealing of $65 million" from the teacher's pension fund. He called it "robbing Peter to pay Paul."
That was in 1995. Then in 1997, state lawmakers made it worse. They said that the CBE didn't have to pay into the pension fund "more than what was required to keep the fund 90% funded, which meant that when the fund's funding level was at least 90%, the CBE paid virtually nothing into it." So instead of sustainably funding the pension over time, they said the CBE could fund it until it got to 90%, thinking that it would just stay that way. Idiots.
Even worse, they changed the state's contribution law so that said "it was the intention for the state" to contribute to the teachers' pension what it had been contributing, which created the legal justification for decreasing pension payments. Basically, the state said "we promise we'll try to fund the teachers' pension like we have historically" and then they didn't.
So the district, with decreasing help from the state, took what experts called a "pension holiday" between 1996-2005, costing the fund about $2 billion. Then the great financial crisis hit and state and local government used its austerity brain to hit the pension fund again, setting CBE's contributions for 2011-2013 as "fixed dollar amounts that were less than required under previous plans."
While these blunders have since been sort of remedied by a 2016 law restoring the dedicated property tax revenue and state contributions, there was a more than 25 year period where neither the state nor the district were contributing to the pension as they should have. The fiscal austerity of the 1990s, combined with centralization, and then the great financial crisis and the bungled recovery at multiple levels, has left the teachers' pension in its 46.8% hole.
This is why Kass says at the beginning that she "bristles" at the term pension crisis. When we look at the structure of the teacher's pension funding--who's responsible for it--and its history--who actually made what decisions when--we can see that the underfunding was by design. It has very little to do with the defined benefit structure of the policy, which was 100% funded as early as 1997, and more to do with the ways the fund was managed and forced to fail.