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

2. 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

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

4. 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

5. 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

6. 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

7. Members’ Role in Keeping the Promise

8. Pension Fund’s Role in Keeping the Promise

9. 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

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

11. 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

12. 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

13. Chicago Teachers’ Pension Fund
The chart below summarizes the sources of unfunded actuarial accrued liability from August 31, to June 30, This includes the time period where the employer (CPS) began diverting pension payments to operations.
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14. 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

15. 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

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

17. 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

18. Benefit Reductions?

19. Fund Consolidation?
40 ILCS 5/ ) (from Ch /2, par )     Sec 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 , eff ; 90-32, eff ; , eff )

20. 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

21. 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 $ $
$ ,680.4
$ 10,812.6
$ ,867.8
52.3%
2018 $ $
$ ,128.4
$ 10,769.5
$ ,359.0
51.0%
2019 $ $
$ ,593.2
$ 10,808.3
$ ,784.9
50.1%
2020 $ $
$ ,075.9
$ 11,047.3
$ ,028.6
50.0%
2025 $ $
$ ,793.8
$ 12,718.2
$ ,075.6
51.3%
2030 $
$ ,060.2
$ ,037.0
$ 15,138.8
$ ,898.2
54.0%
2035 $
$ ,160.6
$ ,642.1
$ 18,190.5
$ ,451.6
57.5%
2040 $
$ ,244.0
$ ,265.7
$ 21,718.2
$ ,547.4
61.6%
2050 $
$ ,397.3
$ ,076.2
$ 28,758.7
$ ,317.5
71.8%
2059 $
$ ,653.9
$ ,870.4
$ 37,683.3
$ ,187.0
90.0%