Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
SNJ Today reports, Underfunded Public Pension Plans Could Hit the Lottery:
Governor Chris Christie is moving forward with his plan to dedicate the state’s lottery revenues to New Jersey’s woefully underfunded public worker pension plans.
The Treasury Department unveiled legislation that the Christie administration wants lawmakers to introduce and approve.
State officials say the plan would immediately reduce unfunded obligations by $13.5 billion for the state’s separate pension funds for teachers, public employees, police, and firefighters.
The state says that would raise the funded ratio of the retirement system from 45 percent to 59 percent.
Democratic Assembly Speaker Vincent Prieto says he continues to question whether it’s an effective plan or a gimmick, but adds that he will review the proposal.
Officials say nothing would change for current state lottery customers.
And Samantha Marcus of NJ Advance Media reports, What you need to know about Christie plan to slash N.J. pension debt with lottery cash:
Gov. Chris Christie’s administration on Thursday released long-awaited details of its proposal to use state lottery proceeds to boost the government worker pension fund.
In a briefing with reporters, the state treasurer emphasized the impact of the proposal, saying it said would take some of the burden off the state budget to come up with more and more money each year and will do more for improve the shaky pension fund than merely contributing the full amount recommended by actuaries.
The strategy is to inject a $13.5 billion asset into the pension fund and give it a guaranteed source of revenue for the next 30 years.
Here’s what you need to know:
How does it work?
Broadly, New Jersey’s lottery will become an asset of the pension fund, just like all of the fund’s stocks, bonds and other investments.
The state hired an outside consultant to determine the value of the fund, and it came back with $13.5 billion. That would immediately slash the state’s pension debt. Treasurer Ford Scudder said the valuation will be updated regularly.
Over the next 30 years, the revenue generated from ticket sales would add $37 billion to the pension fund. The lottery would revert to the state budget after those 30 years.
While there are seven pension funds, only three are considered eligible. These are the Teachers’ Pension and Annuity Fund, the Public Employees’ Retirement System and the Police and Firemen’s Retirement System.
Under the state Constitution, lottery proceeds must be spent on education and state institutions. These three pension funds qualify, as teacher pensions “constitute state aid for education,” and some members of PERS and PFRS work at state institutions or public universities, according to the governor’s proposed legislation.
But they wouldn’t split it evenly.
The asset would be allocated based on a fund’s share of the liabilities, share of the unfunded liabilities and share of total members.
The teachers’ pension fund is the recipient of about 78 percent. While PERS would receive 21 percent and police and fire, a little more than 1 percent.
What will the impact be on the pension funds?
Overall, the state’s unfunded liabilities — the gap between how much money it has and how much it needs to pay future benefits — will drop from $49 billion to $36.5 billion. The total system will go from 44.7 percent funded to 58.9 percent funded.
The effect on the three pension funds will vary.
TPAF would improve from 47 percent funded to 63.9 percent.
The state portion of PERS would boost from 37.8 percent to 49.6 percent funded.
And the state side of PFRS would increase from 41.2 percent to 44.5 percent.
Both PERS and PFRS receive contributions from the state and local government employers.
What does this mean for the lottery?
Not much, according to the state treasurer.
“There will be absolutely no change in the operations of the lottery. If you like to buy lottery tickets, you’ll notice no difference. If you’re a vendor that sells lottery tickets, you’ll notice no difference … the lottery director will remain in charge of the lottery … the lottery will remain a division of the treasury. It will still be overseen by the state lottery commission,” he said.
According to the draft legislation, the director of investment will join the State Lottery Commission.
“The only thing that will change is rather than net proceeds coming to the general fund, they’ll be going in a new common pension fund.”
Where do lottery revenues go now?
They flow into the state budget. Under the state Constitution, lottery income must be spent on state institutions and state aid for education.
It is expected to bring in $965 million this year, helping fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.
Scudder said those programs won’t be left behind. Once the lottery revenue is rerouted to the pension system, they will be funded out of the state budget.
How, when resources are already stretched thin? That’s more complicated.
Once the lottery is deposited in the pension system, it would dramatically decrease the unfunded liabilities, or debt. That would, in turn, eventually reduce the amount of money that needs to be budgeted for the pension contribution.
It’s like a credit card. Your minimum payment is based on how much you owe. The higher your balance gets, the higher your minimum payment gets. But if you pay down your balance, your minimum monthly payment should drop.
In the state’s case, that will free up some money to do other things, like pay for those programs.
According to an analysis provided by the state, the state budget will be able to absorb those costs without any impact for five years. From 2023 to 2029, there will be a hit of about $160 million to $235 million a year.
Where will the ticket proceeds go?
Proceeds from ticket sales can be used to pay out monthly benefits or invest along with the pension system’s other assets.
The lottery’s monthly cash flows will make it easier for the pension fund to pay benefits without having to sell off investments, Scudder said.
I want to first thank Suzanne Bishopric for bringing this to my attention. It has been two years since I discussed New Jersey’s pension war and three years since I discussed how that state’s pension is GASBing for air.
In my opinion, this latest attempt to shore up its chronically underfunded state pensions by using lottery proceeds is a desperate move which will only kick the can further down the road. It will help at the margin, especially for the state teachers’ pension fund, but it’s doing nothing to address serious structural flaws that continue to hamper the state’s pensions.
Worse still, lotteries are a form of regressive taxation, so here you’ll have New Jersey’s poor and working poor buying lottery tickets to fund chronically underfunded state pensions and the cuts in social programs will mostly affect them.
Sure, if the funded status of these chronically underfunded state pensions improves, it will free up money in the state budget to spend on other programs but the truth is there will be cuts to social programs to fund these pensions, and those projections from 2023 to 2029 look awfully optimistic.
And if something goes wrong, and invariably something always goes wrong, that’s it for New Jersey’s pensions, this last attempt to shore them up using state lottery proceeds will be the final straw.
“Ok Leo, so what would be your solution?” My solution would be to amalgamate these state pensions into one large state pension, adopt better governance to remove any political interference, implement a risk-sharing model, hike the contribution rates and lower the benefits for a period of five to ten years, and introduce a special property tax which is progressive, not regressive, for the same time period and make sure these tax revenues are earmarked only for these state pensions.
But Gov. Chris Christie decided to go for the politically expedient and in my opinion, dangerous route of using state lottery proceeds as the cash cow to fund chronically underfunded state pensions.
Why not? US politicians are like all other politicians, their first goal is to be reelected, so they will keep kicking that can down the road until there are no more cans left to kick.