New Jersey lawmakers forged a budget deal in the early hours of the Fourth of July that paved the way for a new law boosting the state’s underfunded pension system with lottery revenues.

Gov. Chris Christie signed a $34.7 billion 2018 fiscal year budget to end a three-day government shutdown while also adding his signature to a bill that steers New Jersey Lottery revenues toward pension funding for the next 30 years.

Christie agreed to approve the new fiscal plan with $300 million in extra education spending advocated by Democrats if the legislature passed the pension measure and an overhaul of the state’s largest public insurer, Horizon Blue Cross Blue Shield. The Republican governor initially called for using Horizon surplus funds for opioid treatment, but agreed to a compromise bill that includes annual audits of the nonprofit health service corporation.

New Jersey Gov. Chris Christie signed a bill that transfers New Jersey Lottery revenues toward the state's pension system.
New Jersey Gov. Chris Christie signed a bill that transfers New Jersey Lottery revenues toward the state's pension system. Bloomberg News

Christie said the lottery legislation will generate $37 billion over the next 30 years toward New Jersey’s pension system, which has the worst funding ratio in the U.S., according to an April report released by Pew Charitable Trusts. He emphasized that the roughly $1 billion of lottery revenues will help increase the pension fund’s value by $13.5 billion and immediately raise the funded ratio from 45% to 59%.

“This is the best the funded ratio of the pension system has been in more than a decade in a half,” said Christie during a press conference announcing the budget deal. “While there is still more work to be done, there can be no doubt that after tonight we are leaving the pension system much better off than we found it in 2010.”

Underfunded pensions played a large role in 11 bond rating downgrades under Christie’s watch since he took office in 2010 to the lowest credit rating in the U.S., with the exception of Illinois. New Jersey general obligation debt is rated A3 by Moody’s Investors Service, A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.

The new 2018 budget includes a state record $2.5 billion payment toward pensions, which is still only 50% of what is actuarially required. The Christie administration says the lottery legislation will elevate the entire retirement system’s funded ratio to roughly 90% by 2047 while also lowering borrowing costs.

Lisa Washburn, managing director at Municipal Market Analytics, said dedicating a revenue source for pension obligations is “modestly positive” since it removes a portion of the required payments from budget uncertainties. She questions though whether accounting rules will allow the state’s intra-entity transfer of future revenue streams and noted risks from the potential drop in asset value during the 30-year period.

“The asserted accounting treatment seems to me to be a questionable way to produce a better funded ratio and reduce future required contributions from the state,” said Washburn. “I see it as more of an optical benefit for the state than a material improvement in the state's pension/fiscal dilemma.”

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