Another time bomb for Chicago taxpayers

Editorial Board

Maybe you think the worst is over for Chicago Public Schools: Springfield sprang for millions in budget and pension relief last year. Time to lean back and sip an icy beverage.

Sorry to interrupt this reverie, but there are 1 billion reasons that you’re wrong. That is, the Chicago Teachers’ Pension Fund is short another $1 billion, according to the fund’s consultants.

Or put differently: If these estimates prove correct, taxpayers are likely on the hook for another $1 billion to shore up the teachers pension fund.

Why is this happening? Because of new estimates that reduce expected investment returns over the next decades by a half-percentage point, from 7.75 percent annually to 7.25 percent. Even a relatively small tweak creates a big hole. Hence, the fund is now estimated to be $11 billion in the red, up from $10 billion.

Over the years, CPS officials and City Hall have taken a two-step approach to the district’s money problems. Step 1: Hold out hand to lawmakers in Springfield. Step 2: Stick other hand into the pockets of Chicago taxpayers.

So we aren’t surprised at the response of CPS CEO Janice Jackson to questions about how the district will cope with the threat of escalating pension costs: “I think the biggest plan is to continue to lobby for additional funding to support our schools.” That is, cue the first hand.

This is a familiar story in Illin-owe. Other distressed Chicago and Illinois public pension funds struggle with the prospect of insolvency — an inability to pay benefits as they come due. The state's unfunded pension liability is crowding out other priorities. Taxpayers can’t keep up. Some take the easy way out: They move. The exodus of residents from Chicago and Illinois continues briskly to other states with lower taxes.

We can’t prove that fear of an even higher tax burden will chase more Illinoisans out of state. But we do know that such dread is well-founded. Citizens who stick around almost certainly will suffer a bigger tax chomp to bail out a slew of public pension funds, local and state. Cue the second hand.

It’s inevitable for Chicagoans in particular because for many years, CPS foolishly deferred much of its required annual pension payment — with state complicity. Those liabilities don’t disappear. They mount. People still retire. They still expect pension checks.

Now the district faces enormous and ever-increasing pension payments because state law requires the Chicago teachers pension fund to be 90 percent funded by 2059. Its current funding is dismal — about 50 percent.

The more the fund earns in investments, the less it needs from taxpayers. Which brings us to the new math of investment earning expectations. The pension fund’s annual report shows a stellar return for the year ending June 30, 2017: about 12.53 percent. But the year before? That was a abysmal minus-0.27 percent.

Over the most recent 10 years, the fund has reaped about a 4.87 percent return. The 25-year return, encompassing years with higher interest rates, is better: 8.16 percent as of January 2018.

What will the next years hold? Who knows? As investment advisers always warn: Past returns aren’t a reliable indicator of future performance. And remember what former New York Mayor Michael Bloomberg said in 2012 when his city’s chief actuary proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent:

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” billionaire Bloomberg scoffed. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”

Yet CPS is counting on 7.25 percent. Taxpayers, guess what that means for you.

(Scott Stantis)