Flemming: Dem legislator explains why a mortgage is a bad analogy for Vermont pension crisis

By David Flemming

On Oct. 6, Hank Kim, of the National Conference on Public Employee Retirement Systems, testified in front of the Pension Benefits, Design, and Funding Task Force, which is responsible for finding a way to reduce Vermont’s massively underfunded state employee and teacher pensions.

Kim said:

Let’s say you know an individual has a mortgage of $200,000. Their income is around annual income is $30,000 a year, obviously there is underfunding there. But as the bank evaluates the credit risk of the borrower, if they see that you know the likelihood of that borrower, or their income is going to grow over the years because they’re in a good job, they perform well etc., that even though through inflation that the mortgage may grow, that as long as the income growth of that borrower keeps pace with that, then the monthly payments will be affordable for that borrower.

And if that borrower is smart and pays a little bit more each month, to make their mortgage instead of a 30-year, be able to pay it off in 28 years, all the better. So we’re not saying that the unfunded ratio will not grow again. It may grow. What we’re trying to measure: is that growth sustainable, based on the economic capacity, and the economic growth capacity of the of the plan sponsor?

Kim’s statement suggests that Vermont isn’t in as much trouble as the alarmists are making it seem. Earlier in his testimony, Kim called attention to the economic benefits that pensions are giving the state economy. If Vermont reduces the pension benefits it gives to state employees and teachers, our economy would suffer.

To her credit, Rep. Sarah Copeland Hanzas, D-Bradford, expressed skepticism of Kim’s dismissal:

The challenge that I’m having at this moment is that the mortgage analogy only works so far in this scenario. When those of us who are thinking of the analogy of our household mortgage, we know what we spent on our house when we bought it. And we know that that is a fixed amount and therefore what we’ll be paying is predetermined. But in the scenario that we find ourselves with unfunded liabilities growing because of demographic assumption changes and/or poor investment performance.

She explained the important distinction between a mortgage and the pension crisis:

Essentially, the amount that we are paying on our home in this mortgage scenario is growing. And I’m challenged to agree with your assessment of this way of determining sustainability, because we may have thought we were buying a $200,000 house and may in fact be that we are buying an $800,000 house or a $1 million house. We just can’t predict what the ADEC payment is going to be into the future so it has become difficult for the General Fund to keep up with even the basic ADEC payments, let alone doing the right thing and paying more than the ADEC.

ADEC stands for Actuarially Determined Employer Contribution, and is the amount actuarially calculated each year that is required to be contributed by an employer to a pension plan’s pool of assets in order to ensure there will be enough funds to pay promised pension benefits.

If we the taxpayers can be compared to a homeowner, our “economic growth capacity” is pretty limited. Vermont’s population remains stagnant, and no strong evidence suggests this will change anytime soon.

The implication in Kim’s mortgage analogy is that Vermont taxpayers are akin to a young homeowner, set to get a good raise to help pay for underfunded pensions for all of their hard work. But Copeland Hanzas reminds Kim of Vermont’s “unfunded liabilities growing because of demographic assumption changes.” Those demographic changes are an aging, rapidly retiring population that is putting less money in the state coffers for funding the pensions.

To watch Kim and Copeland Hanzas, view video above or click here.

David Flemming is a policy analyst for the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.

Image courtesy of state of Vermont

6 thoughts on “Flemming: Dem legislator explains why a mortgage is a bad analogy for Vermont pension crisis

  1. I don’t care about the “mortgage analogy” but I do care about the bill that came out of Rep Copeland Hanzas’ committee of which she is the chair. This draconium bill was forwarded to the legislative committee as a starting point for discussion. If Rep Copeland Hanzas is a democrat she sure has some very conservative points of view. Her committee just mirrored Vermont State Treasurer Beth Pierce’s recommendations for a “quick fix” for the problems set up by former Gov Dean who raided the retirement plan for his own purposes. So the problem is a nightmare caused by the legislature.
    As a retired Vermont teacher I watched fellow teachers attend night school to get a masters degree and flee Vermont to MA, NY, and CT to earn a decent salary. The State better be prepared to have a panic as many of the recent teachers have a MA or MS and certainly will be leaving if they find their 6 or 7 years to retirement has turned into 16 or 17 years with reduced benefits.
    Rep Copeland Hanzas will be held responsible, of that you can be sure.
    Remember, this is a problem caused by the legislature and Beth Pierce, State Treasurer, not by the teachers. How long are we going to put up with this incompetence?

  2. The Vermont politicians have a responsibility to tax payers to run the state government in a financially responsible and competitive manner……..Sticking with a defined benefit pension plan does not meet this standard of responsibility and hasn’t for years…..This is wrong.

    The private sector has essentially abandoned defined benefit pension plans because of the cost, the investment risk, expanded life expectations and responsibility to share holders.

    It’s time for the Vermont politicians to switch the conversation from how to fund the ever growing and gapping deficit in the state defined benefit pension funds and turn the focus to converting to a defined contribution model. This change would place state workers on equal footing with the private sector work force and finally lead to bringing the pension deficit/funding problem under control……..This is what is owed to the tax payers and also fair to the state workers.

    What we need is some backbone in Montpelier to do the proper, fiscally responsible and right thing.

    • The trouble with VT politicians, at least the majority party, is their more capable at kicking the can down the road then actually fixing problems..
      But that’s what you get electing leftist to do a conservatives job..
      Dealing in Feelz instead of reality is what made California the financial mess it’s in and the hoard in Montpeculiar more wishes to emulate them then fix our problems. We need smarter voters before anythings going to go right
      for VT..

    • Peter, well stated but no one under the ” Golden Doom ” yes doom doesn’t have any
      interest in solving this problem, we all live within our means Government should be
      setting by example………

  3. Why is the State guarantying a specified rate of return in the first place? What is about the typical financial advisor’s disclaimer, that “past performance is no guaranty of future results”, that the government and education unions don’t understand? More importantly, how can the State legislature not understand this?

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