The New York Times takes a look at the mess the Chicago Teachers' Pension Fund is in, and has been for awhile:

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in.

[snip]

Indeed, the State Legislature granted the Chicago school district a break from its pension contributions, starting in 1995. Since then, the city has never contributed the required amount; for many years it put in nothing. All the while, the teachers’ benefits kept building up.

But something else crucial happened in 1995, which Eric Zorn has been writing about for a long time. For years, Chicagoans have paid into both the Chicago teachers' fund and the suburban/downstate fund, but the state was at least kicking back a substantial amount of that money. Then, Mayor Daley took control of CPS, and started mixing pension and educational funds; the pension fund director argues that this cost the fund $3 billion. Meanwhile, the state's pension kickback to Chicago fell apart, leaving what was once a relatively well-funded system in a huge hole:

Another part of the deal was that the state would try to kick 20 to 30 percent of overall teacher retirement-fund payments back to Chicago, kind of like in the old days. But this aspiration — this goal — has lately gone by the wayside as budgets have tightened.

In fiscal 1995, the first year of the deal, Chicago got 23.2 percent of the money that went to the Teachers' Retirement Fund. Fair enough, or close to it.

By fiscal 2012, that figure had dropped to 0.4 percent — not quite nothing but almost — with Chicago getting shorted by roughly $540 million, according to Chicago Teachers' Pension Fund estimates.

In March, a bill was proposed that would bump it back up to ten percent, less than half of what it was in 1995.

This fight has been playing out for a couple years now. It's part of what cost the previous Chicago Teachers Union head her job, as CORE fought back against Ron Huberman's proposed union concessions towards rebalancing the pension fund:

Before asking teachers to support pension relief or any other compromises, [CORE co-chair Jackson] Potter wants the district to cut a number of controversial reform programs, such as the Office of School Turnarounds and Huberman’s signature performance management initiative. Such cuts could save the district upwards of $70 million, he estimates. 

Really, it wasn't that bad a decade ago:

The three-year reduction in required CPS employer pension contributions and the State’s elimination of its regular contribution to the pension fund are rapidly weakening the financial health of the fund, which fell from 100% funded in FY2000 to only 61.1% funded in FY2011 on a market value of assets basis.

It's really a mess from every angle. Chicagoans pay into two different pension systems and have for a long time, but they at least got some of that back. Then, as the city ceased paying its required amount, the state pulled most of its kickback. So the city and state started making noise about pension reform, not to mention all sorts of other reforms. So then teachers started fleeing the system—about 2,000 this year. Which means more retirees, and less people paying into the system. The baby boom didn't help matters any, but it's quite dramatic for a massive pension fund to drop 40 percent in funding over a decade, and it took a lot of different changes—underpayments by the city and state, an economic collapse, and waves of retirees—for it to happen.

Photograph: Chicago Tribune