Gov. Chris Christie’s state treasurer appeared before lawmakers yesterday to make an in-person pitch for the administration’s proposal to use the revenue-generating state Lottery to help prop up New Jersey’s beleaguered public-employee pension system.
Whether the lawmakers decide to play along under what’s now a tight deadline for action remains to be seen.
During an afternoon hearing, State Treasurer Ford Scudder walked members of the Senate Budget and Appropriations Committee through the finer details of the complicated proposal, which this week has been incorporated into a piece of formal legislation.
Boosting the funding ratio
The treasurer said making the Lottery enterprise an asset of the state pension system for the next three decades would improve the system’s funded ratio from 45 percent to up to near 60 percent, while at the same time adding no extra costs to the state budget. He also said the change would help restore confidence among government workers that the teetering pension system would be on firmer footing.
“People are nervous about the certainty of their pension and benefits in retirement,” Scudder said. “Many have lost faith in the stock market following the collapses in asset values accompanying the tech bubble and the Great Recession, so they look to their state pension for security.”
The bill was only put up for discussion yesterday, and several lawmakers praised the proposal, including the bipartisan sponsors of the legislation. But Sen. Jennifer Beck (R-Monmouth) suggested she’s hoping to hear from Wall Street rating agencies before making a final decision on the measure, which the Christie administration is looking to enact by July 1. Union leaders also weighed in on the bill yesterday, with their opinions ranging from neutral to adamantly opposed.
Christie, a second-term Republican, has tried to enact a number of policies to boost the pension system, which has suffered from years of underfunding by his administration and others, and earlier this year he first floated the idea of transferring the Lottery into the pension system to improve its finances.
Ahead on paper
On paper, the pension system would benefit for the next 30 years by having the Lottery — which generates nearly $1 billion in annual revenue and was recently valued at $13.5 billion — effectively transferred onto its balance sheet.
The fiscal maneuver should also have little immediate impact on the state budget because it will reduce an unfunded pension liability that right now measures close to $50 billion, and that figure is used by actuaries each year to determine how much the state should be putting into the pension system out of the budget to help maintain its solvency.
Language in the state constitution right now requires proceeds from the nearly 50-year-old Lottery to benefit “state institutions and state aid for education,” a broad category that has allowed the revenues to be spent in a number of ways over the years, including on higher education, veterans, psychiatric hospitals, and programs for the developmentally disabled.
To adhere to that language after the asset transfer would occur, the bill calls for the proceeds to benefit only the retirement funds for teachers (TPAF), general state workers (PERS), and state-employed police officers and firefighters (PFRS). Under the proposal, 78 percent of the revenues would go to the teachers’ fund, 21 percent to the general public workers’ fund, and 1 percent to the police and firefighters fund. The reduction in the annual pension contribution that’s tied to the lowered unfunded liability will also free up revenue in the state budget to fully pay for all the programs that right now are being funded with Lottery proceeds, Scudder said.
The proposal also assumes that Lottery revenues will continue to grow between 1.6 percent and 1 percent over the next 30 years, something that could be a long-term concern given some recent studies indicate millennials are far less interested in playing lotteries than prior generations.
The issue of risk was raised by Committee Chairman Paul Sarlo (D-Bergen) during the hearing yesterday.
“What is the downside?” asked Sarlo, who is co-sponsoring the bill.
But Scudder said the legislation calls for regular revaluations of the Lottery that would account for any drop-off in revenues.
“I don’t really see there being a risk to this. It’s going to improve our funded ratios tremendously, such as our investors are going to see us having improved our fiscal situation,” Scudder said. “At the same time, we’re not impacting programs funded by the Lottery, so I don’t really see negatives to this.”
Sen. Steve Oroho (R-Sussex) called the proposal a “win-win,” and said the only risk lies in the fact that people don’t trust state government due to prior fund diversions.
But a review of the proposal that was distributed earlier this week by the bond-analysis firm Municipal Market Analytics suggested the transfer takes advantage of some “accounting and actuarial magic” to remain budget neutral.
“The state has a long history of shorting its pension system and this transaction may end up doing more of the same,” the MMA review said.
Will Wall Street weigh in?
Beck, the GOP senator, said she would like one of the major Wall Street rating agencies to weigh in before any final votes on the bill are cast. Scudder said Treasury has been updating the rating agencies on the proposed transfer, but has yet to provide them with a formal presentation.
“I certainly would feel more confident if I knew that those that are doing this on a regular basis, and those that do this kind of analysis for a living, embrace this,” Beck said. “It would be nice to know now, if possible.”
Ed Richardson, executive director of the New Jersey Education Association, said his union right now is remaining neutral on the proposal. He called the proposal’s promise of a $1 billion annual pension contribution over the next 30 years significant, but also said he’s heard lawmakers make long-term commitments before only to see them get unraveled in court rulings.
“In a word, I would say that we have skepticism,” Richardson said.
Rex Reid, the state political and legislative representative for the American Federation of State, County and Municipal Employees, went a step further and said his union opposes the transfer. He also pushed backed forcefully at times against assertions that funds for the existing programs that are funded by the Lottery will be protected after the asset transfer occurs.
“We don’t see this as a dedication with firm standing underneath it,” Reid said. “We see this as a gimmick.”