Reick Analyzes Chicago School Problems

Appearing on his web page is the following:

Chicago Messes Its Bed, Then Asks Us To Clean It Up

Posted on July 28, 2017 by Steve Reick

The big issue in Springfield this week is the school funding bill, SB1, which contains the new funding formula for schools.

The governor claims, and he’s right, that the bill contains a provision that, in effect, diverts money from education to bail out the Chicago Public School pension system.

Therefore, even though he’s willing to sign a bill containing the new funding formula, he’s not willing to sign bill containing this poison pill provision.

It’s being said that even though we’ve passed a budget, unless SB1 is signed by the governor, schools cannot open in the fall.

Steve Reick

I don’t agree with that, and I’ll tell you why shortly.

However, before we get into the meat of the bill, I thought it’d be a good idea to give you a little bit of history about how the CPS pension system ended up in the condition that it’s in.

In 1995, a deal was struck between CPS and the State of Illinois, a deal which gave control of CPS to Mayor Richard M. Daley.

Part of the arrangement called for the Chicago Board of Education to have the flexibility to mingle education funds with funds formerly earmarked only for pensions.

As part of the deal, the General Assembly agreed to let CPS quit paying anything into the pension fund for 10 years and, instead, use the money for other things, like teacher salaries, with the hope that the state would boost its contributions in that period. (Yeah, right.)

In an article written by Greg Hinz in November of 2012 and published in Crain’s Chicago Business, the story continues. It’s a great article, and you should read the whole thing. Here’s a big part of it:

For awhile, according to Mr. (Kevin) Huber (executive director of the Chicago Teachers’ Pension Fund), things worked out all right. With the stock market taking off in the late 1990s, CTPF’s “funded ratio” of assets to anticipated liabilities actually topped 100 percent for a couple of years…

But when the market dropped, so did the funded ratio.

By 2005, it was down to 79 percent — due not only to the market decline but to the absence of a cumulative 2 billion dollar pension-payment holiday (emphasis mine).

In 2006, the board resumed making payments.

Then came another crisis and a predictable response:

Ron Huberman, CPS chief at the time, went to Springfield and got another, partial pension-payment holiday.

This one lasted from 2011-13 and allowed the board to put in only $200 million a year — not the $600 million it was supposed to contribute.

Though then Chicago Teachers Union Vice President Jesse Sharkey says he recalls the union objected in Springfield, other sources say any objection was perfunctory.

The key votes were 48-6-3 in the Senate and 92-17-7 in the House, which ought to tell you something.

Why wasn’t there a bigger fight?

After all, the funded ratio, predictably, has kept dropping and was down to a miserable 59.76 percent in 2011.

Perhaps the reason is that, financial crisis or not and plummeting funded ratio or not, CPS kept delivering nice, sweet, across-the-board raises to CTU members like clockwork.

Between 1995 and 2011, the board agreed to annual pay increases of between 3 percent and 4 percent every year.

And, I stress, those were across-the-board raises, above and beyond the “step” hikes for experience, obtaining a higher college degree, etc.

Put a different way: Between 1995 and 2011, any teacher on the payroll throughout that period was entitled to an 82 percent raise — before step hikes. (Again, emphasis mine)

When Mayor Rahm Emanuel came into office, his new board cancelled the last negotiated 4 percent hike, for 2011.

But the horse was way, way, way out of the barn by then.

In 2014, the latest pension holiday will expire.

That means CPS and taxpayers are on the hook for at least another $400 million or more in pension payments a year.

That’s why you hear officials talking about a $1 billion CPS deficit next year.

The union’s Mr. Sharkey says the CTU clearly understands that no one in the union wants “an insolvent pension fund.”

All sides need to sit down as a group and negotiate something, he says. CTPF’s Mr. Huber is holding out hope for a pending bill that would reduce the unfunded liability to zero by 2059 — if, that is, nearly bankrupt Illinois will pony up another $200 million or so a year, and if CPS increases its contributions 7 percent a year, every year.”

If Mr. Sharkey wanted to be honest about not wanting an insolvent pension fund, he’d have said that nobody wants an insolvent pension fund until his people can get every dime they can out of it before it completely collapsed.

So there you have the background.

Chicago messed its own bed and now is holding a new funding formula hostage in order to force the rest of us agree to clean it up.

You’ve heard them say that it’s not fair that they pay into their own pensions and also pay for downstate pensions with their income tax money.

There are more than 2 billion reasons why that’s not true.

Cry me a river.


Reick Analyzes Chicago School Problems — 9 Comments

  1. That’s what DEMOCRAT’s do – FUBAR everything and then cry that they need more
    of your money (tax increase) to fix the problems that they created in the first place.

    That’s the way Mike Madigan and his Ponzi Party rolls.

    When you’re a DEMOCRAT you never take responsibility for your actions.

    Do you see all those “home for sale” signs ?

    Those are the smart people joining the Great Exodus out of Illinois.

    I hope to join them in the not to distant future, what about you ?

  2. Would anyone lend a moving truck for this folk? Tic, tock, tic, tock…

  3. The citizens of Chicago, by virtue of their selection and election of inept politicians ongoing for many decades, own the entire problem.

    The rest of Illinois should not bail out Chicago.

    Unfortunately, these politicians have not only mismanaged Chicago, but the entire State of Illinois with their inept leaders running the Illinois Legislature in Springfield for more than 3 decades.

    The Chicago stink has made the State of Illinois the worst State in the US fiscally.

  4. A moving truck for this guy please…How does Montana sounds for you?
    Tic, tock, tic, tock…

  5. The only way to fix the problem is to Starve The Beast . . . Angel you will run out of Tic, Tocks.

  6. Another example of hiking salaries instead of funding pensions.

    The sister scheme is hiking pension benefits, even if pensions are underfunded.

    The cousin scheme is hiking retiree healthcare benefits, even if there is no funding allocated to pay for future benefits.

    A trifecta.

  7. Chicago Tribune

    July 31, 2017

    CPS Buys Short-term Relief With Bonds That will carry Costs for Decades

    – CPS’ recent $500 million [principal] in loans will have to be paid over the course of 30 years.

    by Juan Perez Jr. and Peter Matuszak


    This story is notable for a number of reasons.

    1. The school district is borrowing money over 30 years to pay current year costs.

    Would you borrow money to be paid back over 30 years, to pay this year’s expenses?

    Many of these expenses are unique as explained below.


    2. In exchange for receiving $500 million from bondholders right now, the school district has agreed to pay the bondholders the $500 million principal + $850 million interest over the next 30 years.

    A 5:8.5 ratio of principal:interest is high.


    3. Interest rate is 6.75% to 7%.

    That’s high.


    4. No significant principal reduction payments for the first 20 years (mostly interest will be paid in the first 20 years).

    Plenty of Illinois school districts have agreed to pay little principal in the first years of the payback plan.


    4. Here is how the $500 million will be disbursed:

    – $229 million to reimburse itself for swap contract termination payouts to banks in 2015 & 2016 (the district lost its bet that interest rates would rise).

    – $31 million to reimburse itself for capital expenses already paid out

    – $200 million restructuring of existing debt that ADDS $300 million in interest costs to the old debt.

    The $300M is included in the $850M noted above.

    – $33 million upfront discounts to initial buyers, presumably to compensate for risk.

    – $6.7 million in fees to consultants, bankers and lawyers (issuance costs).


    Obviously the taxpayers have local control in name only in the Chicago Public School District 299.


    Be sure to watch the bond deals in your local property taxing districts and at the state and federal levels.


    We are in a debt and underfunded obligations bubble at the local, state and Federal levels (bonds, underfunded pensions, underfunded retiree healthcare, Medicare, Social Security, etc.).

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