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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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Theodore Konshak
Whose Cover-Up? Mark Glennon said: “The plan assumes a very high rate of return on its investments of 7.75%.” A projection made by an investment adviser for the Chicago Teachers’ Pension Fund had resulted in a 7.75% return. The actuary recommended 7.50% in her actuarial experience study. Presumably, Mister Glennon believes both rates are too high. If you were an actuary, Mister Glennon, how do you counter the investment adviser’s very high projected rate of return? The Executive Director of the Chicago Teachers’ Pension Fund may cite a survey made by the National Association of State Retirement Administrators where the median actuarial interest rate assumption is 7.50%… Read more »
Mr. Konshak: I’ll simplify this for you — others may find it useful for understanding. It’s pointless / irrelevant to blame actuaries, investment advisors or EVEN the Trustees (who are in “somewhat” (see below) of a position of power to determine assumptions, for the Chicago govt ees pension plans including CPS). Actuarial assumptions are made to get an IDEA of the present value of future liabilities of a DB pension plan. As decades go by actuarial LOSSES occur when some of the assumptions have been too “rosy”, AND contributions have been TOO SMALL !!!!! The disaster is when the accumulated experience losses and the unaffordably large contribution… Read more »
mark glennon

I agree with all that. Of course, if you back it up still further to where ultimate blame lies it’s voters.

J.A. Herzrent
In a sesnse you are correct — that in a democracy the legislature is an agent for those who vote representatives into office. Implicitly, those who live in a democracy are presumed to agree to the terms of the constitution and laws of the jurisdiction. The Illinois Supreme Court has ruled that expectations of public employees must be honored in a way that prevents adverse modification of the pension plan that was in effect on their date of hire. However, under separation of powers principles of the constitution, only the legislature can raise taxes and appropriate funds to pension trusts. If the voters elect new legislatoirs who… Read more »
J.A. Herzrent
Steve-oh is correct in describing the role of actuaries and trustees. Assigning blame is pointless in the additional sense that the public officials implicated in this mess are immune from lawsuits and liability. Moreover, if the actuaries are culpable for doing the bidding of those who paid their fees, we should recognize that the actuaries and their consulting firms do not have enough resources or malpractice insurance to make a dent in the problem. Blaming gets you no where. Suing gets you lawyers’ fees — most of which end up being paid from the public purse. The current stand-off leads to bankruptcy …. perhaps sooner rather than… Read more »

Um, the article says it’s hardly all the fault of actuaries, and actuaries “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.” And there’s years of criticism on this site of the other parts of LaSalle Street that are part of the pension scam, with more to come soon. If you’re point is to criticize them, join the party. If your point is to defend actuaries, good luck.

Theodore Konshak

Um, I don’t see any explicit reference in the article above to the role of the investment advisers. You wrote an article as if you are expert on actuarial matters. So go all the way. Answer the question. If you were the actuary, Mister Glennon, how do you counter the investment adviser’s very high projected rate of return?

mark glennon

The trustees dictate the assumed rate of return, based more on what the politicians who appointed them want than on the advisors, who are also political. I’d tell them all to take a jump, then I’d be fired.

Theodore Konshak

Read those minutes from the Chicago Teachers’ Pension Fund. The investment adviser had projected a rate of return of 7.75%. There is no conspiracy involving politicians.

You are going to walk away and become a Chicago firefighter?

Theodore Konshak
Mark Glennon said: “The plan assumes a very high rate of return on its investments of 7.75%.” In the minutes of the Board of Trustees meeting of April 15, 2008, the Board of Trustees of the Chicago Teachers’ Pension Fund wanted to lower the actuarial interest rate assumption to 7.75% based on the projections of the Fund’s investment managers. You are critical of actuaries for their failure to be critical of their fellow actuaries. Will you fail to be critical of your fellow investment managers? The actuary has to contend with the projected investment return such as 7.75% presented by the investment managers. You said it is… Read more »

These pensions are based on the assumption that the people who make up the tax base will still be in Illinois when the taxes come due. Many people, both retired and working, will continue to move out of Illinois to escape these very high tax rates. This will further erode the pension solvency and accelerate the decline of the pension funds. Eventually, a financial death spiral develops and the CPS defaults and control of its finances are taken over by the courts. The courts will determine the new and lower level of pension payments and the state will finally kick in a small amount of money.

J.A. Herzrent
The courts don’t necessarily get in right either. In Detroit, the judge approved a plan that favored pensioners over bondholders. The pensioners took a relatively small haircut and lost their COLA for a while. But one year out of bankruptcy it appears that the funding situation has become worse due to new GASB rules that everyone knew were on the horizon: A wise actuary once observed that in a defined benefit plan the participants eventually get out only what the employer puts in (adjusted by earnings, losses, etc.) There has to be widespread recognition of this among the teachers and their union leaders. Their stonewalling and… Read more »
Theodore Konshak

You said: “A wise actuary once observed that in a defined benefit plan the participants eventually get out only what the employer puts in (adjusted by earnings, losses, etc.)”. That is the definition of a defined contribution plan. Pension plans in the private sector are guaranteed by the Pension Benefit Guaranty Corporation. If there is a shortfall in what the employer puts in, the Pension Benefit Guaranty Corporation steps in and eliminates the shortfall. Give me the name of this so-called ‘wise actuary’. Sounds like a stupid actuary to me.

J.A. Herzrent
He was a partner at Wyatt Company (the former name of a large actuarial firm), first name Marvin, and still widely respected 15 years after his death. PBGC does not insure plans maintained by governmental employers — which I thought was the topic under discussion. One can cite instances of contributions by entities other than employers to a public plan — including, of course, employee contributions. In Detroit, some major charities ponied up pension payments in order to protect publicly owned art from being seized by the bankruptcy court for the benefit of creditors. The point of the comment was that a public pension trust can run… Read more »
Theodore Konshak

I think your memory must be failing you. I doubt an actuary ever said that. It is hard to argue with a deal man named Marvin. If he is such a wise actuary, he must have published an article somewhere where he shared his profound wisdom with others. Absent that, you may have to find an actuary that is alive that agrees with you.

You can void a contract in bankruptcy but it doesn’t mean that no contract ever existed.

Theodore Konshak

In the bankruptcy of the City of Detroit, if defined benefit pension plans can only pay out what was put in, why are they sitting at the table in this bankruptcy proceeding? They would no right to sit at the table.

J.A. Herzrent
We may be getting closser to my point — which is when the pension trust runs out of money the benefits won’t be paid. UNLESS, of course, more money gets contributed to the trust. The main source of money is tax revenues and a court can’t legislate taxes. Perhaps a court could order employer assets to be sold and the proceeds deposited in the plan. (That was the situation in Detroit where the parties negotiated a settlement in lieu of selling off the art collection.) There was a contract — probably more than one. The city (or school board) had a union contract and the constitution says… Read more »
Theodore Konshak

I like your death spiral idea. To see the concept of a death spiral applied to the Chicago Teachers’ Pension Fund itself, see my research paper. Google: “Theodore Konshak scribd”.

Theodore Konshak

“actuaries require that the unfunded liability should also be amortized by additional amounts paid every year”, Under the amortization method used, there is no payment to reduce the unfunded liability. It is a negative amortization. Multiply the unfunded liability by 7.75% and notice that the interest is greater than the amortization payment.


That’s right, because the Trustees evidently told the actuaries “we can’t afford a straightline amortization to pay off the $10B Unf Accd Liab, is there any other way?”
And the actuary prob said “You could amortize it over an increasing line method that goes up as future salary scale goes up, but I wouldn’t recommend it”. And the Trustees prob said “Let’s go with that”. Therefore the current “payment” of it as part of the overall recommended annual contribution, is much less than $775M for the upcoming year. I’m just hypothesizing, but it had to be something VERY close to that !

Theodore Konshak

Excellent understanding of the amortization methods. It makes the pension plan look healthier that it is. The Annual Required Contribution is less. The Board of Trustees and the actuary are probably on the same page wanting the pension plan look healthier than it actually is.

Jim Palermo

Another way to look at the CTS plan is to compare the inflows and outflows for the year.

In FY 2015, benefits + expenses exceeded the employee + employer contributions by $522 million. Based on beginning fiscal year market assets of $10.85 billion, the plan had to earn 4.8% just to keep the assets value from falling. Alas, the plan earned just 3.6% on market assets and the balance decline by $140 million.

Given that the 4.8% return needed to keep assets from falling is closer to reality than the 7.75% expected return, it is hard to conclude that the CTS plan is sustainable.

Theodore Konshak
In the minutes of the Board of Trustees meeting of April 15, 2008, the Board of Trustees of the Chicago Teachers’ Pension Fund wanted to lower the actuarial interest rate assumption to 7.75% based on the projections of the Fund’s investment managers. So, Mr. Palmero, before you completely blame the actuarial profession for this mess, why don’t you discuss the role of investment mangers? Trying to divert some of the blame away from investment managers? If an actuary such as Jeremy Gold wanted to lower the actuarial interest rate of the Chicago Teachers’ Pension Fund to 3.,00%, he would have to contend with the conflicting expertise of… Read more »

Mr. Konshak, before I answer your question on the investment manager’s role in pension plan management, can you explain why you believe a 7.75% is reasonable, particularly in light of the CTF’s low funded ratio and the higher level of liquidity necessary in light of this low level?

Theodore Konshak

I am not saying 7.75% is reasonable. Read my research paper. Google: “Theodore Konshak scribd”. If you watched the video of Actuary Jeremy Gold, we don’t approach the issue in the same manner, but our conclusions are very similar. Except I go back to 1995 and say the actuarial interest rate was too high then.

Theodore Konshak

I am not Tim Sharpe. Small plans have small actuaries. A deal is a deal, Mister Palermo. I await your answer to the question on the role of investment advisers. Give me a big plan answer. According to the 2014 Comprehensive Annual Financial Report (CAFR) of the Chicago Teachers’ Pension Fund, they apparently have two investment advisers and 57 investment managers. Don’t give me a small plan answer where an insurance agent or mutual fund salesman is the only investment adviser / manager.

Jim Palermo
Mr. Konshak, I have not ‘completely blamed the actuarial profession for this mess’. In fact, in my initial response to your comments, I did not even refer to the actuarial profession, so please, be accurate in your characterizations of my comments. I am sure your are sophisticated enough to know that public meeting minutes capture only is said at a meeting, not what was unsaid or the pre agreed decisions that get made outside the meeting. We both agree that the 7.75% expected rate of return is too high, but we can only speculate on why it survives. As for investment managers’ role in the funding level… Read more »
Theodore Konshak
You can derive the story from the minutes. I know when something was done on the ‘spur of the moment’. Thinking about that actuarial interest change for second, the Board of Trustees came to the conclusion that they would be solely responsible for that decision. They better have the actuary review it and take responsibility for it. We don’t have to speculate on why that 7.75% survives. If you as trustee and the actuary decide to drop the actuarial interest rate to 3.00% and triple the contribution requirement, the Village President will want your scalp. “What outdated mortality table?”, the Village President says. The plan participants will… Read more »
Jim Palermo

Mr. Konshak, are you suggesting that plan participants are troubled by an actuarial adjustment resulting in the funded ratio declining from 80% to 50%? If the amount of money in the plan is unchanged due to reduction of the expected return and future contributions need to increase, what’s the problem?


So, the question I have is this, as a current employee paying into TRS, what should I do? I am required to pay a portion of my salary into the pit of despair. The public is mad at the employees who receive pensions, and won’t be willing to fund the shortfall. The legislature has proven time and again to raid the payments to the fund, putting it at even greater risk. School districts would have to gut educational programs for kids to make up the difference. I am afraid the pool will be empty when I take my plunge into retirement. What can I do?


Dave: It’s probably still a very good bet for you. Even if you only get 50% of the promise, it’s still much much better bft and payable sooner than social security.
But to be on the safer side, you should squirrel away 5k or 10k/year into the ‘ee contribution pre-tax of the 457 plan. That money won’t be used to beef up the DB pension. It will stay there and be guaranteed to be yours, that’s almost a certainty.

mark glennon

Dave- Well said. Wish I had easy answers. Part of the answer is for pension participants to recognize the facts and state them exactly as you have. Instead, the debate is swamped by a union and extremist narrative that opposes all meaningful reform and denies the realities you described. Speak up. Challenge the teachers’ unions and the machine politicians they’ve bought who oppose all reform.

Theodore Konshak

The Chicago Teachers’ Union (CTU) may preach against discrimination on the basis of race or gender but they will tolerate discrimination on the basis of hire date. The union leader of the CTU has done nothing to reverse this injustice after Tier 2 benefits were enacted. The contradictions of capitalism and the contradictions of Karen Lewis are one and the same.

The Democratic and Republican parties are both responsible for this crooked mess. It is time for a third party to emerge. Maybe a party of clean hands and clean water.

Glad I’m not the only one who noticed. Tier 2 benefits have been in place for 5 years now, yet none of the unions have created a corresponding 2-tiered dues structure to account for their Tier 2 members whom will receive substantially less benefits than their Tier 1 members. And if the CTU and other teacher unions are so high on tenure protection, shouldn’t they determine the cost of that protection and add it into the cost of union membership? In the first-in-first-out union world, why should a Year 1/Tier 2 teacher at the bottom of the pay scale pay the same amount in dues as Year… Read more »
Theodore Konshak

Mark Glennon and Karen Lewis think like Englishmen. The German unions and economy are doing just fine. When did the Chicago Irish become Englishmen? The only good Englishman …

Theodore Konshak

Karen Lewis tells the lowly paid Tier 2 teacher to say 25% of their pay for the potential strike. Twenty-five percent of nothing is nothing.

This is positively Greece-like. So far, only the taxpayers have been the big losers (why should pens bfts for these govt ees be so huge and paid so early?), and make taxpayers pay 30-40-50% of govt ees’ payroll ? That’s already highway robbery, providing pensions to high-paid teachers making 90,000/yr for working 9.5 mos/year, that are 75% of final avg pay with 34 yrs svc which is often age 59…..pensions w/ 3% COLA that are worth over $1.5M? Insane to promise that much. By the way, Greece’s social security system promises fairly large (nothing like these, not even close) pensions at age 50 for most workers, and… Read more »
Big-time BRAVO, Mark……Great article!! Here’s a way to look at it, also, that’s even MORE frightening for taxpayers or CPS participants in the plan, or more likely each will be harmed to a large degree by the time this is over. The scariest part of this financial disaster, must be put into context first: There are 30,000 retirees, and 30,000 actively-employed “educators” making $2.15B in payroll per year right now. The Unfunded Accrued Liability is SO HUGE, it’s 7.75% of the $10B Unfunded……so that JUST paying cash contributions equalling just the INTEREST on the unfunded, is $775M per year !! And THAT is a contribution that does… Read more »

Sorry, badly worded, should be: The Unfunded Accd Liab is SO HUGE, at $10B (Accd Liab being 20B and Assets just 10B), that even just paying annual interest on it is 7.75% of 10B, = $775M/year, a monstrous amount at 40% of the 2.15B/yr Payroll.

S and P 500
Terms such as unfunded liability, present value, discount rate, etc. never confused me but I suppose they might be Greek to a union teacher, despite his or her college degree and despite the fact that people in the private sector are expected to understand what those terms mean when they pick 401K plans. The problem with a straightforward statement like “future retirees are owed $100 billion and that money hasn’t been set aside” would still be warped and spun by union newsletters. The union would say that it’s like a future credit card bill. I think the best way to describe the $100 billion is that it’s… Read more »
J.A. Herzrent

Those at the upper end of the seniority and pay scales (together with those already retired) understand the issues in my opinion. Their strategy is to play dumb and stonewall and file lawsuits while they collect their COLA-adjusted pensions and retiree health benefits until the fund runs dry. I expect the wiser individuals in this group are using some of their retirement largesse to invest for their post-pension retirements because they understand that you can’t fool all the people all the time.

J. A. Herzrent

The longer the cover-up persists, the more pension payments will have been made, irrevocably, to those already retired or those closest to retirement. That active school teachers would strike to protect this erosion (land-slide, really) out of their trust fund is surely odd. The unions should be seeking measures to allocate the existing assets fairly among all age cohorts rather than to force the city and the district into bankruptcy. The taxpayers, students and active teachers have a common interest in cutting-back on the unsustainable benefits that were carelessly or cynically bestowed in prior years.

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. That $67,000 average pension for 30+ years is pretty skewed. A quick query of BGA database tells me out of the oldest 300 CPS pensions, only 10% are above the average. That means that average pension is pushed downward by a lot of folks on the end of the life expectancy chart. Expect that average to increase rapidly over the coming years, if it hasn’t already. It shows the unfunded liability increasing ever year for 23 more years, even with ever… Read more »
Rex the Wonder Dog!

The unfunded ratio, which is now called by GASB the “plan fiduciary net position as a percentage of liability,” is 53.2%.

53% after the biggest Bull Market in US history.

The plans are not going to pay out at 100%. I would guess 50% at best, maybe less if they keep kicking the can.


They will pay 100% to some and when the aquifer runs dry 0% to the remaining believers in solidarity forever. Chicago should start selling lottery tickets with the winner to be he/she who guesses the date when the last payment is made. It might be sooner then you think if a court shuts the pension system down and pays out the assets ratably at 50% — although I think 50% overstates what’s available.


Great article,,,,
Two Typos,,,, Million, not Billion
1. it should be about, $775 million per year in accrued interest , not $775 billion
2. taxpayers should put $975 million into pension fund, not $975 billion, just to keep fund even.