New Jersey Lottery receipt slump pressures pension funding

A slump in New Jersey Lottery revenues adds stress to the state’s already struggling pension system.

The state was counting on the lottery for $1.1 billion of its planned $3.75 billion pension payment for the 2020 fiscal year, but receipts totaled $937 million for the 12-month period ending June 30, an 11.6% drop from the year-ago period, according to the New Jersey Department of Treasury.

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“The decline in lottery revenues is one more concern for policymakers in the state trying to balance their budget,” said Greg Mennis, director of research on public sector retirement systems at Pew Charitable Trusts. “The missed revenue will have to be covered from other revenue sources.”

The New Jersey Lottery became a state pension asset three years ago, when former Gov. Chris Christie signed legislation steering New Jersey Lottery revenues to the pension system following years of underfunding. New Jersey has the worst pension funding rate of the 50 U.S. states at an estimated 33% for the 2020 fiscal year, according to Pew.

The shortage stems mainly from the COVID-19 pandemic. Year-over-year revenues dropped 29% in March and 25% in April, when stay-at-home orders were in effect across the state. Lottery sales have since improved, but not to year-ago levels, with revenues off 5% in May and less than 1% for June.

Shortfalls in lottery revenue contributions toward pensions will need to be made up from New Jersey’s general fund, if the state wants to keep pace with its funding goals. The anticipated $3.75 billion pension payment represents a 70% actuarial determined contribution level and is in line with the state’s formula to increase ADC funding by 10% each fiscal year.

Gov. Phil Murphy’s initial 2021 budget proposal, unveiled Feb. 25, would have boosted pension payments by $729 million and brought the system to 80% ADC. State lawmakers later agreed to extend the 2020 fiscal year by three months, until Sept. 30, due to the economic implications of the virus and Murphy is scheduled to release a revised budget by Aug. 25. He signed a three-month $7.6 billion stopgap budget last month that defers a previously planned $951 million quarterly pension payment due Sept. 30 into October.

“It’s a big increase in a year where revenues across the board are going down,” said Mennis of the state’s goal for a 10% pension funding increase. “This would be a very positive step for the pension system.”

New Jersey’s steep pension burden has driven 12 downgrades to the state’s general obligation bonds during the past decade, with its credit rating now the second worst of all U.S. states, ahead of only Illinois, which has its own pension woes. The Garden State’s GOs are rated A-minus by S&P Global Ratings and Fitch Ratings, A3 by Moody’s Investors Service and A by Kroll Bond Rating Agency.

S&P credit analyst David Hitchcock said if New Jersey’s pension funding level ends up slightly below 70% for the 2020 fiscal year it won't have a major credit impact. He stressed it is important for New Jersey to navigate the lottery revenue struggles and stick to its commitment to an 80% pension funding level in 2021, which is still way short of what is needed to keep the system healthy.

"The question is whether they will be able to make to the full 80% contribution in 2021,” Hitchcock said. "Pension funding is an important credit consideration for the state."

The press offices for Murphy and State Treasurer Elizabeth Maher Muoio did not immediately respond for comment on how lottery revenue figures would factor into pension funding in the next budget.