Mayor Rahm Emanuel’s hand-picked school team is trying to persuade the Chicago Teachers Pension Fund to accept a partial pension payment — as little as $200 million of the $634 million due June 30 — because the Chicago Public School system doesn’t have enough cash on hand to make the full payment and still pay its employees.
Never before has the nation’s third-largest school system either missed or reduced a pension payment the district wasn’t authorized to skip or cut by the Illinois General Assembly.
A partial payment this time around would be a dubious and dangerous first that could trigger a pension fund lawsuit and a further drop in a CPS bond rating that’s already been reduced to junk status.
But sources said top mayoral aides are arguing behind the scenes that desperate times require desperate measures.
Emanuel’s quest for a state sales tax on services and a land-based, city-owned casino are caught up in the state budget stalemate between rookie Republican Gov. Bruce Rauner and Democratic legislative leaders over Rauner’s demand for anti-union, pro-business reforms.
So is the mayor’s plan — already approved by the House and Senate — to save Chicago taxpayers $843 million over five years by giving the city 15 additional years to ramp up to 90 percent funding levels for the police and fire pension funds.
The General Assembly hasn’t even entertained the issue of teacher pension reform by ending what Emanuel calls the “dual taxation” that forces Chicagoans to pay twice — for the retirement of city teachers and for teachers outside Chicago.
As a result of the deadlock and millions in refinancing costs tied to its drop to junk bond status, CPS does not have enough cash on hand to make the full, $634 million pension payment and still cover payroll.
A $200 million payment is all the system can afford without massive layoffs and classroom cuts, City Hall contends.
Still, Charles Burbridge, executive director of the Chicago Teachers Pension Fund, is resisting any partial payment.
“The Chicago Teachers’ Pension Fund expects full payment from the Board of Education and has not been given specific direction otherwise. Full payments are crucial to the long-term viability of the fund. Beyond that we won’t speculate on events that are yet to occur,” Burbridge was quoted as saying in an emailed statement.
In a statement Thursday, an Emanuel spokeswoman said: “Mayor Emanuel believes we are at a tipping point and that Springfield must take action to ensure the city is not forced to make a decision that forces us to choose between making a $634 million pension payment and the educational investments that our children need and deserve. The impact of this year’s massive payment means CPS would spend $1,600 less per student on education than every other district in the state, with severe and harmful consequences.”
But late last week, the mayor issued a statement that hinted even more strongly at a partial payment.
“If a full pension payment is made, our classrooms will be impacted,” that earlier statement said in part.
Municipal finance expert Matt Fabian said a partial pension payment is the latest in a string of “budget gimmicks” that got CPS into this mess. It will make the long-term solution more costly.
But he said, “It’s the better of several fairly wretched options. It’s better than defaulting on their bonds. It’s better than not making payroll. Not making payroll becomes a direct operating issue. Then, they’re pushing cost onto students and families. They’d have to cut teachers. Politically, not making payroll is distinctly more negative.”
Fabian said he’s not surprised that Emanuel’s hand-picked school team has chosen to make a partial pension payment for the first time in CPS history.
“That always seemed like the most likely outcome because raising taxes is extremely difficult under state law and cutting expenses is very difficult politically. Cutting spending [by closing 50 public schools] is the reason the runoff happened in the first place,” Fabian said.
Unlike police and fire pension funds, the teachers pension fund does not have the ability to intercept state school aid if a pension payment is missed.
“I could see them agreeing to this. The district is in such distress, you would think a lawsuit now would be less productive. Pressing for additional claims has to be an uphill battle,” Fabian said.
CPS is facing a $1.1 billion shortfall and a $9.5 billion pension crisis that threatens the on-time opening of Chicago Public Schools this fall.
The Chicago Teachers Union’s contract expires June 30. CTU President Karen Lewis has promised to lead her members out on strike for the second time in three years if teachers don’t get a fair contract
Ironically, making a partial payment instead of a full one could reduce the chance of a teachers strike.
The union is demanding a one-year contract with a three percent pay raise. CPS is seeking a three-year deal with no raise in the first two years and a one percent increase in the third year.
“It could make it easier to offer teachers more money because they won’t have to spend it on this. Pensioners are getting shortchanged,” Fabian said.
“Maybe that’s how the board is hoping to navigate its problems: by playing active teachers against pensioners.”
The full, $634 million payment was built into a school budget balanced by an accounting sleight-of-hand. Still, CPS is facing a liquidity crisis tied to the bond rating drop.
When the CPS bond rating was reduced to junk status, the district was forced to renegotiate $220 million in outstanding swap agreements and pay penalties and higher interest rates on a massive refinancing.
“It puts us in a Catch-22. It’s better to make some sort of payment. But they should have been prepared for this. They knew this was coming,” said Ald. Scott Waguespack (32nd), one of Emanuel’s most outspoken City Council critics.
“If the partial payment helps, that’s fine. But if it sets the precedent that they can get away with it and continue down that path, that really sets a negative tone to their approach to getting their finances in order.”
Established in 1895, the Chicago Teachers Pension Fund is the oldest of 646 public pension funds in Illinois.
It has assets to cover just 51.5 percent of its liabilities and paid $1.3 billion in service, retirement, disability and survivor benefits in fiscal 2014.
The fund has 63,194 members. They include 30,654 active employees, 4,818 inactive members and 27,722 beneficiaries.