Council of the Great City Schools Defined Benefit Pensions CFO Conference San Antonio, TX November 8, 2016

Why do we care? Our school districts contribute to pensions We expect to receive a pension Plans are under attack because: Liabilities exceed assets Benefits are deemed to be too generous Contributions are considered to be unsustainable

National Pension Funding *2015 Data source: Pew Charitable Trusts.org

2015 ISBE General Funds Appropriations Total $6.8 Billion CPS Share $1.8 Billion (26%) MCATs $1.7 Billion (25.4%) ECE/Bilingual $355 Million (5.3%) General State $4.4 Billion (65.5%) Other $257 Million (3.8%) Source: General State Aid Presentation – ISBE www.isbe.net/funding/ppt/gsa-basics-pres.pdf

State Funding Inequity CTPF received $62.1 million from the State of Illinois in 2015, a $50 million increase over 2014, but the 2016 appropriation dropped to $12.1 million CTPF receives less than a penny for every dollar spent on TRS

How are DB plans suppose to work? Employee makes “normal cost” contribution Employer makes “normal cost” contribution Contributions are invested Investments pay benefits For example: CTPF annual payout--$1.4 billion CTPF assets if fully funded--$20.0 billion CTPF investment income at 7.75%--$1.55 billion Investment income exceeds payout—fund grows

Members’ Role in Keeping the Promise

Pension Fund’s Role in Keeping the Promise

DB plans have benefits? Non-optional savings program Efficient and effective provider of retirement income—stable risk profile, professionally managed Automatic economic stabilizer—payouts are unaffected by economic cycles

Impact of Chicago Teacher Pensions on Illinois The Buck Stays Here Impact of Chicago Teacher Pensions on Illinois

Where did it go wrong? Employer contributions were not mandatory or sufficient—you cannot invest what you do not have Normal cost did not reflect benefit—costs were back-loaded, risks were not shared, and expected returns were overstated Funding ratios became the end rather than a measure of the means to the end—when plans hit 100%, disciplined funding plans were abandoned

Employer’s Role in Keeping the Promise June 30, CTPF received a total of $634 million Second year that CTPF has received a full employer contribution after three-year pension holiday, and 20 years of underfunding

Chicago Teachers’ Pension Fund The chart below summarizes the sources of unfunded actuarial accrued liability from August 31, 1996 to June 30, 2015. This includes the time period where the employer (CPS) began diverting pension payments to operations. 5563009 /13805

Cause & Effect Of Underfunding If CTPF were fully funded and investment returns matched actuarial assumption then 100% of $1.3 billion in benefits would be paid by investment returns ($20 billion X 7.75=$1.55 billion) Since CTPF is only 50% funded, all other things being equal, only 60% of benefits are paid by investment returns and the remainder is paid by current contributions and or the sale of assets

CTPF case study Funding discipline went out the door as fund approached 100% funding in 90’s Normal cost was not adjusted to share risks as returns ebbed and benefits were increased Employer was authorized to skip required payments RESULTS: 50% funding ratio, rapidly rising employer contributions, and calls for reform

CTPF Funding History Prior to 1995 CTPF was funded through City of Chicago tax levy. 1995 legislation redirected tax levy to CPS operating budget.

Solutions to Underfunding Reduce member benefits Combine CTPF with another fund Fix k-12 education funding Stop—digging the hole and stabilize the asset base Drop—pretense that pensions are separate from education costs and price services appropriately Roll—funding plans across generations

Benefit Reductions?

Fund Consolidation? 40 ILCS 5/17-146.1) (from Ch. 108 1/2, par. 17-146.1)     Sec. 17-146.1. Participation in commingled investment funds; transfer of investment functions and securities.     (a) The Board may invest in any commingled investment fund or funds established and maintained by the Illinois State Board of Investment under the provisions of Article 22A of this Code. All commingled fund participations shall be subject to the law governing the Illinois State Board of Investment and the rules, policies and directives of that Board.     (b) The Board may, by resolution duly adopted by a majority vote of its membership, transfer to the Illinois State Board of Investment created by Article 22A of this Code, for management and administration, all investments owned by the Fund of every kind and character. Upon completion of such transfer, the authority of the Board to make investments shall terminate. Thereafter, all investments of the reserves of the Fund shall be made by the Illinois State Board of Investment in accordance with the provisions of Article 22A of this Code.      (Source: P.A. 90-19, eff. 6-20-97; 90-32, eff. 6-27-97; 90-566, eff. 1-2-98.)

Fix K-12 Operations and Funding? Make actuarially required pension contributions Make monthly pension contributions rather than an annual contribution Understand that contributions do not compete with teacher compensation, they are teacher compensation

Contributions, Liabilities, Assets and Funded Ratio Fiscal Year Employee Contributions Required Board of Education Contributions Total Actuarial Liability Actuarial Value of Assets Unfunded Actuarial Liability Funded Ratio 2017 $ 187.3 $ 720.2 $ 20,680.4 $ 10,812.6 $ 9,867.8 52.3% 2018 $ 193.4 $ 760.2 $ 21,128.4 $ 10,769.5 $ 10,359.0 51.0% 2019 $ 199.7 $ 784.9 $ 21,593.2 $ 10,808.3 $ 10,784.9 50.1% 2020 $ 206.0 $ 809.8 $ 22,075.9 $ 11,047.3 $ 11,028.6 50.0% 2025 $ 239.4 $ 941.0 $ 24,793.8 $ 12,718.2 $ 12,075.6 51.3% 2030 $ 269.7 $ 1,060.2 $ 28,037.0 $ 15,138.8 $ 12,898.2 54.0% 2035 $ 295.3 $ 1,160.6 $ 31,642.1 $ 18,190.5 $ 13,451.6 57.5% 2040 $ 316.5 $ 1,244.0 $ 35,265.7 $ 21,718.2 $ 13,547.4 61.6% 2050 $ 355.5 $ 1,397.3 $ 40,076.2 $ 28,758.7 $ 11,317.5 71.8% 2059 $ 420.8 $ 1,653.9 $ 41,870.4 $ 37,683.3 $ 4,187.0 90.0%