Chicago Public Schools Sinks $1B Deeper in Debt

Chicago’s pension system has taken another blow as unfavorable investment returns have driven the Chicago Teachers Pension Fund (CTPF) $1 billion deeper into debt.

According to the Chicago Tribune, the pension system for Chicago teachers is now facing an $11 billion shortfall in a time where state law requires the CTPF to be 90% funded by 2059. With no indication of where the money will come from other than tax hikes and budget cuts, the CTPF is in the same predicament as other Illinois pension funds that make up the state’s $130 billion shortfall.

“We are aware of our obligations, and we will continue to meet our obligations for all of the pensions. But I think the biggest plan is to continue to lobby for additional funding to support our schools,” Chicago Public Schools CEO Janice Jackson told the Tribune.

The CPS had previously arranged an agreement with the state that deferred its annual pension payments, but once the fund’s health waned due to the deal, the fund has had trouble maintaining its obligations. The Tribune reports that a $700 million-plus contribution to the fund was covered by short-term loans from the district last year. In addition to the loans, the state also agreed to cover about $550 million in CPS pension payments, which will cost the state $230 million per year.

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However, Gov. Bruce Rauner’s spending plan could throw the state pension relief out the window, as it’s looking to cut the assistance. The CPS now projects an annual payment to the fund at nearly $1 billion, with only 50% of its benefit obligations able to be covered by its assets.

“What you’re going to end up doing is diverting money that was initially intended to be operating revenue to educate kids to pay for what you didn’t put into your pension system in the past,” Ralph Martire, executive director of the Center for Tax and Budget Accountability, told the Tribune. “That’s going to be what happens, because there’s no way out of making the pension payment. Our state constitution is very clear.”

Tags: Chicago Public Schools, Chicago Teachers’ Pension Fund, Debt, Pension

Japan’s $1.54 trillion Government Pension Investment Fund (GPIF) is revising the fee structure for its active asset managers in a move to increase their incentive for producing higher returns, according to a report from the Financial Times.

Under the new structure, which will be implemented next month, the fund will pay the managers a fee that is based on the excess returns they produce. The GPIF said its external asset managers are too focused on acquiring more assets, and have avoided taking the necessary risks required to reach their target alpha.

“By introducing the new fee structure, we would like to build a win-win relationship between GPIF and external asset managers,” said the fund. “Without excess returns, their fee must be equal to that of passive managers with the same amount of asset size.” GPIF added that its current pay rate does “not motivate asset managers to achieve alignment of interest between GPIF and external asset managers.”

Active asset managers for GPIF include Amundi, Schroders, Invesco, Eastspring, Nomura, Fidelity International, JPMorgan Asset Management, and UBS, according to the FT.

In the GPIF’s most recent full-year financial report, the fund had a return of 5.86%, which was below its benchmark of 6.22%. And for the 11 years since the GPIF was established in 2006, the total rate of return on all investment assets was 2.91%, which produced excess returns of just 0.04 percentage points over the benchmark of 2.87% during that same period.

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The idea of changing the way the fund pays its active managers was first floated in October by GPIF President Norihiro Takahashi, who told a delegation of senior Australian funds management executives that he wanted to propose a variable fee structure instead of a fixed one, according to the Australian Financial Review.

“If a manager gains alpha, GPIF would pay a manager a certain fee. If a manager gains above alpha, GPIF would pay more, and we would not limit the fee,” Takahashi told the delegation. “If a manager gains below alpha, GPIF would pay less. Finally, if alpha is at zero or negative, GPIF would pay the manager an equal amount to that a passive-style manager would receive.”

Takahashi said the fund believed a variable pay structure would be fair because it expects active managers would gain enough alpha.

“But some managers are reluctant to take more risk to gain alpha,” he added, “because they can gain relatively high fees compared to passive-style managers, even when they gain zero.”

Tags: Active Management, Fee Structure, GPIF, Japan, Pension