August 26, 2016
The Chicago Board of Education approved a reinstated dedicated pension levy as part of the Chicago Public Schools (CPS) FY2017 budget on August 24, 2016. The levy will allow the District to bring in $250.0 million in new revenue in FY2017. This additional property tax revenue will be used to fund the Chicago Teachers’ Pension Fund.
Since CPS is subject to the Property Tax Extension Limitation Law (PTELL, also known as “tax caps”), additional property tax revenue for pensions had to be approved by the Illinois General Assembly and signed into law by the Governor.[1] At the end of the spring 2016 legislative session, the General Assembly passed Public Act 99-0521 as part of the State’s stopgap budget. This legislation allows CPS to levy a property tax dedicated to the Chicago Teachers’ Pension Fund at a tax rate of 0.383%. This levy is expected to generate about $250 million per year.
The District relies heavily on property tax revenue to fund its operations. In FY2017, property tax revenue is projected to make up 48.5% of the District’s total state, local and federal revenues for its general operating fund. The reinstatement of the teachers’ pension levy will help ease financial pressure on CPS’ general operating fund and will help rebuild the funded ratio of the Chicago Teachers’ Pension Fund. CPS is required to make a contribution of $720.2 million to the Chicago Teachers’ Pension Fund in FY2017, growing to $815.7 million in FY2021.
Background
Prior to 1990, CPS had a property tax levy dedicated to funding the Chicago Teachers’ Pension Fund (CTPF).
On July 24, 1990, the Civic Federation testified at a Chicago Board of Education public hearing in opposition to a proposal to transfer tax dollars earmarked for the Chicago Teachers’ Pension Fund to cover general operating expenses and salary increases. The Civic Federation warned that this diversion of pension funding to the general operating fund would raise the unfunded liability of the pension fund.[2] Nonetheless, the legislation allowing this transfer was signed into law and went into effect for the term of the teachers’ contract from 1990 to 1993.
On May 3, 1993, the Civic Federation again warned the Board of Education that redirecting the pension fund tax levy to fund general operations would have a serious impact on the funded ratio of the CTPF and that CPS would fall into financial trouble if the State did not provide a stable source of revenues.[3] These concerns indeed came to fruition.
Over the years, contributions to the pension fund continued to fall short of necessary funding levels. The lack of a dedicated levy, in combination with statutory funding language that allowed the District to skip pension contributions if it was over 90% funded contributed to the pension fund’s dwindling funded ratio. Additionally, a provision included in Public Act 96-0889 passed by the State Legislature in 2010 allowed for a three-year pension funding holiday from FY2011-FY2013. In the ten years between FY2006 and FY2015, unfunded liabilities for the pension fund increased by 210.4%, rising from nearly $3.1 billion to $9.6 billion. The unfunded actuarial accrued liability, which is the dollar value of accrued liabilities not covered by the actuarial value of assets, is far larger than the CPS FY2016 operating budget of $5.7 billion.
Given CPS’ serious fiscal challenges and the inconsistency of State funding, the Civic Federation supports the property tax increase from this levy reinstatement. While recognizing that multiple painful Chicago property tax increases have taken place in recent months, the Federation believes that a reliable and recurring source of revenue is critical to resolving the CPS pension funding crisis.
Helpful Links:
Civic Federation’s Property Tax Extension Primer
Civic Federation’s Analysis of the CPS FY2017 Budget
[1] Another way to increase property tax revenue beyond the cap is through a referendum. However, CPS has never used the referendum since it became subject to PTELL. For more information, read the Civic Federation’s Property Tax Extension Primer.
[2] Civic Federation, “Statement made at the Chicago Board of Education public hearing on the FY1991 Budget,” Bulletin No. 1058, July 24, 1990.
[3] Civic Federation, “Statement on the Chicago Public Schools Budget,” Bulletin No. 1089, September 2, 1993.