Wednesday, July 1, 2015

Pensions Liabilities Force Layoffs at Chicago Public Schools

Buried beneath the glaring headlines of the debt crisis of Greece and Puerto Rico, lies the under-reported story of the public pension and debt crisis of the Chicago Public School System (or CPS). Facing massive public employee unfunded liabilities and a judicial climate unsupportive of reform, the bonds of CPS, along with those of the City of Chicago were downgraded by Moody's Investors Service to junk bond status this past May. Moody's took the action almost immediately following a landmark decision on public employee pension reform by the Illinois State Supreme Court.

The court struck down a pension reform measure passed by the Illinois legislature in 2014 designed to stem the hemorrhaging of funds to address the state's severely underfunded public employee retirement system. The pension reform plan included provisions to eliminate an annual cost of living adjustment of 3%, while boosting public agency contributions to the system, in an effort to bring the struggling state pension plan to 100% funding in thirty years

As to Chicago Public Schools, the Moody's action downgraded $6.2 billion of bonds to junk status. Citing its public employee pension exposure, the rating agency pointed to the stunning growth in CPS' annual pension funding requirements, from $197 million in 2013, to $634 million in 2015.  It is that latest pension payment of $634 million that gave rise to the recent funding crisis for CPS,as the district found itself simply unable to pay. With the deadline for the contribution of June 30 approaching and no extension possible, CPS sought a variety of measures to help it keep from default on its pension contribution.

When the smoke cleared last night, the payment was made, but we now learn at the expense of 1,400 salaried positions at the School District. In reporting on its plan to make payment on its public employee pension obligation, CPS made mention for the first time of its plan to eliminate 1,400 positions in an effort to reduce expenses by $200 million to bring its budget back within its limits. Faced with a sudden and previously unannounced plan to lay off teachers, the President of the Chicago Teachers Union claimed, " Mayor Emmanuel's handpicked board has led this district over a financial cliff."

Unfortunately, this may not be the last time we hear these or similar criticisms of local government in the years ahead. CPS will have a payment of this or larger proportions in 2016, as well.