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Moody's Says NJ Still a Gamble, Despite Pension Fund Tapping Lottery Revenues

Credit-rating agency also warns of difficulties servicing growing pension payments, but does not reduce state’s A3 ranking

NJ Lottery

Despite a new law that funnels about $1 billion in annual New Jersey Lottery revenues directly into the state’s beleaguered public-employee pension system, a major Wall Street credit-rating agency is warning there remains “considerable risk” since the state faces still-rising pension obligations.

The notice issued earlier this week by Moody’s Investors Service also noted that changes to New Jersey’s spending and revenue policies that would help make swelling pension contributions more affordable “could prove very difficult to implement.”

Moody’s didn’t make any changes to the state’s A3 credit rating while issuing the report, but with Gov. Chris Christie getting ready to leave office early next year, it served to underscore the huge fiscal challenge that New Jersey’s next governor will have to confront. Pension payments are scheduled to ramp up over the next several years, but without a clearly defined way to cover those planned increases.

Pension-reform plans

The Wall Street notice also comes after several pension-reform initiatives have been enacted by Christie during his two terms in office, including the recent repurposing of the Lottery revenues and a 2011 law that increased employee pension contributions. But Christie has also followed throughout his tenure a practice of making only partial state pension contributions, even as New Jersey’s pension system has been ranking among the nation’s worst-funded state retirement plans in recent years.

“The consequences of not appropriating the full contribution remain substantial because of the very low funded status of New Jersey's pension funds,” the Moody’s report said. “Further contribution holidays would greatly diminish the assets available to pay pension benefits, and put the state at risk of having to pay pension benefits directly from its general fund.”

A spokesman for the state Department of Treasury, in response to the Moody’s report, defended Christie’s Lottery legislation, suggesting the policy change would ultimately help the state’s finances by improving investor confidence and lowering overall borrowing costs.

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In all, New Jersey’s pension system is underfunded by nearly $50 billion as of the latest official accounting. And while the recent shifting of the roughly $1 billion in annual Lottery revenues into the pension system provides a new steady stream of cash, the Lottery revenues in sum represent only about 20 percent of the total amount of funding the state should be putting into the pension system on an annual basis to help restore the retirement plan to good health.

Christie’s latest state budget also earmarked another $1.5 billion for the pension system, pushing the total state payment for the 2018 fiscal year to about 50 percent of the amount that actuaries have calculated. And the state is also scheduled during the 2018 fiscal year to begin making its pension contributions on a quarterly basis under a new law adopted by Christie and lawmakers last year.

The Moody’s report credited the Lottery-transfer legislation as a “slightly positive” move for creating a new “funding floor” that will make it much harder for future governors to completely eliminate state funding for the pension system, something Christie did during his first full year in office.

No sugarcoating

But the Moody’s report also didn’t sugarcoat the remaining fiscal challenge posed by the state’s current pension-contribution ramp-up schedule, which calls for the total state payment to double within the next five fiscal years even as Lottery revenues are expected to remain relatively flat.

“The majority of future pension contributions remain subject to appropriation, which continues to be a key risk to the state's funding plan,” Moody’s said. “In addition, annual pension contributions will not increase significantly with this (Lottery) transaction, because the lottery revenues will mostly replace planned contributions that would have otherwise come from the state's general fund.”

Among the candidates running this year to replace Christie, whose second and final term in office is set to expire in early 2018, are Republican Kim Guadagno and Democrat Phil Murphy, and both have already put forward policies they plan to adopt to address the pension-funding issue.

Gubernatorial candidates weigh in

Guadagno, who’s served as Christie’s lieutenant governor throughout his tenure, has embraced a series of cost-cutting reforms issued in 2015 by a Christie administration study commission, including offering employees less-generous healthcare coverage and moving workers into a new cash-balance retirement system that would have some features of a 401(k) plan. For his part, Murphy, a former Goldman Sachs executive, has committed to bringing the state up to full funding of the actuarially calculated pension contribution, and he hasn’t shied away from talk of increasing taxes to be able to bring in more revenue for the annual budget, including hiking the income-tax rate for millionaires and hedge-fund managers.

But in a prior report on New Jersey’s financial predicament, Moody’s suggested it may take some combination of the two approaches for the state to fully close the pension-funding gap.

“A mixture of slightly stronger economic growth, tax increases, and structural spending cuts would close the deficit and make the rising fixed-costs affordable,” the earlier report said.

The latest Moody’s report, however, suggested it won’t be easy to make major revenue or spending changes in a state like New Jersey, where residents already face some of the nation’s highest tax rates and public-worker unions yield significant power.

“There remains considerable risk that the state will be unable to afford rapidly growing pension contributions without implementing structural revenue or spending changes, and such changes could prove very difficult to implement,” the report said.

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