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By: Mark Glennon*


Last week, the Chicago Public School Teachers’ Pension Fund posted its actuarial report for the 2015 fiscal year that ended June 30. Like the four pensions for the city itself, that pension for the school district is a major item in Chicago’s financial crisis.


First, a note about the report itself. It’s the usual for public pension actuarial reports — full of obfuscation, loose ends, hidden issues and terms used inconsistently. It presumably complies with accepted standards, but that’s the problem. Like almost all public pension reports, few reporters, policy makers or pension trustees can be expected to decipher it. It contrasts sharply with the report for TRS, Illinois’ pension for teachers outside of Chicago, which was written to be understood and clearly calls out problems.


The basics:

The unfunded liability increased from $9.5 billion as of June 30, 2014, to $10 billion as of June 30, 2015. That’s the “net pension liability” or NPL, which is the new language used by the Governmental Accounting Standards Board.


The funded ratio, which is now called by GASB the “plan fiduciary net position as a percentage of liability,” is 53.2%. Horrible as that is, it’s not uncommon for Illinois pensions. The state pensions are about 40% funded. Chicago’s police and firefighter pensions are under 30%.


The plan assumes a very high rate of return on its investments of 7.75%. However, the fund did have a good year last year, returning 8.2%


The $9.5 billion net pension liability does not include healthcare liabilities owed to retirees (though the report glosses over that), which adds another $1.9 billion or so, which is entirely unfunded. The discount rate used for measuring that liability is 4.5%. What’s the logic behind discounting a liability that’s entirely unfunded? None, in my personal opinion, though discounting it is routine.


Average salaries and pensions.

Average salaries are $84,924. For employees with 30-34 years of service, average salaries are $93,144. For those with 25-29 years of service, average salaries are $89,256.


For retirees who worked for 30 or more years, the average annual pension payment is $67,000. For those who worked 25-29 years the average is $51,000.


Some observations:

• The pension will continue to deteriorate even if CPS finds a way to balance its budget and make the pension contribution it plans. In other words, the can is being kicked.


A simple way to see that is to consider that the $10 billion unfunded liability accrues interest at 7.75%, which is its assumed rate of return, or about $775 million per year. Add to that the “normal cost,” which is the additional liability accruing each year for work that year, and subtract the contributions made by employees. Those net an additional $200 million or so per year. So, taxpayers need to be putting in about $975 million just to keep the fund even, assuming it exactly meets its return expectations. (Never mind that actuaries require that the unfunded liability should also be amortized by additional amounts paid every year. That would blow these numbers sky high.) The school district (plus some small additional amounts from the state) are slated to contribute only about $675 million. The shortfall is another kick of the can.


Source: CPS budget,
Source: CPS budget,

You can also look at the actuary’s own projection (not that it’s worth much). It shows the unfunded liability increasing ever year for 23 more years, even with ever increasing annual contributions taxpayers supposedly will make. That ramp of increasing taxpayer contributions is shown on the right. The pension, according to the actuary’s projection, would not reach 90% funding until the year 2059.


• The fund doesn’t even have enough to set aside to pay current retirees; nothing is there for active workers. The discounted obligation owed to pensioners already retired is $15 billion. (Roughly, that is. The actuaries didn’t bother to do their sub-totalling consistently on page 33.) Since the fund has only about $10 billion in assets, it doesn’t have nearly enough even for them. Active workers have nothing invested on their behalf.


Wouldn’t it be nice to have just the raw numbers? Specifically, a common sense way to gut check a pension’s health, for most people, would be just the see the total of obligations owed and compare that to how much is on hand. With that, the public would begin to see how pernicious and impactful high return assumptions are. This report, like most, omits those numbers. They would shock most people. In this case, the “actuarially accrued liability” in the report is about $20 billion, which is discounted 7.75% for each year of projected payouts and compounds. Eliminate that to show just the raw number and you’ll get liabilities totaling something astronomical — probably well over $100 billion — though it’s hard to guess at without more information.


Finally, just a personal viewpoint: These reports are useful only for some current and historical data because those numbers can be checked and verified. But it’s the forward looking numbers that are key to making pensions work, and I trust none of them. Having looked at these for a number of years, I rarely see a single number that isn’t suspect — subject to manipulation and phony assumptions.


Actuaries are hired and paid by those they are supposed to be scrutinizing objectively. They don’t. They are subject to the same pressures that make most government financial work a game of denial, delay, extending and pretending. It’s hardly all their fault. They do what they are told, and key assumptions are dictated to them by pensions themselves or politicians, including that 7.75% return assumption used in this report.


There’s a simple term for what’s going on with pensions like this. One being used in headlines about a different Chicago story you’ve surely seen: Cover-up.


*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

Correction made 1/4/16: Changed “unfunded ratio” to “funded ratio” in the fourth paragraph, which is now called by GASB the “plan fiduciary net position as a percentage of liability.” Thanks to a sharp reader who caught that.



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