Treasury Paid BOA $34M to Shift Lottery to State Employee Pension Fund

Administration claims money was well spent, says Lottery initiative has helped drive down borrowing costs by boosting investor confidence in recent bond issues

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Gov. Chris Christie’s administration paid Bank of America’s Merrill Lynch division nearly $34 million in consulting fees for work the firm did last year on the complicated transaction that turned the state Lottery into an asset of the troubled public-employee pension system.

The administration has been crediting the Lottery initiative for helping to drive down state borrowing costs by increasing investor confidence in recent state bond issues, and Christie personally praised the policy change during his final State of the State address in Trenton earlier this week, as he touted his own record on pension funding. The effect of the initiative was to shift monies that would have been used in the general budget to the pension system.

The fees totaling $33.89 million that were paid to Bank of America for its consulting services on the Lottery initiative were not previously disclosed by the state Department of Treasury. What’s more, these were not fees paid as a commission but for time and work spent on completing the project.

NJ Spotlight learned of the payment earlier this week after being provided with documents from Treasury in response to a public-records request.

‘Commensurate with private-sector transactions’

Asked to detail the services that were provided by Bank of America yesterday, Treasury spokesman Willem Rijksen cited the firm’s “research and expertise,” and said Bank of America’s fees were “commensurate with private-sector transactions of similar size and scope.”

“Bank of America was selected to assist with the Lottery Enterprise Contribution because it had previously completed over five years of research evaluating and structuring various asset-transfer transactions for the State of New Jersey,” Rijksen said.

“In addition, it should be noted that the fee agreement was success-based so that the state would only have to pay the majority of the fees in the event that the transaction was successful and the state accordingly reaping the benefits,” he went on to say.

A Bank of America spokesman declined comment yesterday, citing company policy.

The state hired Bank of America as a financial advisor early last year, and Christie first proposed the idea of dedicating Lottery revenues to benefit the pension system in his February 2017 budget address. With nearly $1 billion in annual revenue, Christie, a Republican, said at the time that the Lottery could be better leveraged by the state to help prop up a pension system that had been recently named by Bloomberg as the worst-funded state retirement plan in the country.

Christie under pressure

The proposal also came as Christie continued to face pressure to improve the pension system’s financial standing after failing to live up to a major pension-funding promise made during his first term, when he pledged to ramp up state contributions to the full amount required by actuaries over a seven-year period. Instead, Christie stopped following the ramp-up schedule after three years, and revenues that had been earmarked for worker retirements were used to plug budget holes in both 2014 and 2015.

While Christie, who leaves office next week, eventually resumed ramping up pension payments, the current budgeted contribution of $2.5 billion is about half the amount that actuaries have said is needed to restore the system to good health, and the condition of the pension system remains a regular concern raised by credit-rating agencies.

The Christie administration officially proposed the 44-page Lottery Enterprise Contribution Act last spring as lawmakers were putting together a budget for the 2018 fiscal year. The Lottery itself was valued at approximately $13.5 billion, and under the Christie administration’s projections, it will generate a total of $37 billion in revenue for the pension system over the next 30 years. At the end of the 30-year term, the Lottery will no longer be tied directly to the pension system, and if future governors make required contributions, the system’s funded ratio will have improved from below 50 percent to 90 percent, according to the administration’s projections.

The Lottery proposal ultimately won support from Democrats who control the Legislature, and last year state pension officials said they were expecting the Lottery to provide roughly $83 million in cash on a monthly basis throughout the 2018 fiscal year, which runs through June 30, as a result of the policy change.

Dipping into general budget

Meanwhile, as a result of the completed transfer, funds from the general state budget are now being used to cover programs Lottery proceeds have previously paid for, including higher education, veterans, psychiatric hospitals, and programs for the developmentally disabled. That will make those programs more susceptible to future state budget problems.

Also complicating matters for the transfer were rules written into the state constitution that restrict how Lottery proceeds can be used. To not run afoul of those restrictions, the Lottery revenues will only benefit the retirement funds for teachers (TPAF), general state workers (PERS), and state-employed police officers and firefighters (PFRS). Under the Christie administration’s estimates, 78 percent of the Lottery revenues will go to the teachers’ fund, 21 percent to the general public-workers’ fund, and 1 percent to the police and firefighters.

While the transfer did not result in an immediate credit-rating boost for New Jersey, which has one of the lowest debt grades of any U.S. state, Treasury officials pointed to its effectiveness following the recent closing of a state refunding issue. A news release issued by the department earlier this week said the increased investor interest in state bond issues has helped to save taxpayers a total of $47 million since the transfer was enacted in July.

Rijksen also pointed to the decision by S&P Global Ratings this past summer to move the state’s credit outlook from “negative” to “stable.”

“Clearly, the benefit of LECA far exceeds the one-time fees incurred to complete the one-of-a-kind innovative transaction to bolster the state pension system with $37B in funding over 30 years,” Rijksen said.