New Jersey Gov. Chris Christie’s proposal to used dedicated state lottery revenues to boost its underfunded pension system is not a viable solution, according to Municipal Market Analytics.
Christie has pushed the lottery plan since his February budget address arguing that that it would lead to an immediate $13 billion improvement in the pension fund’s unfunded liability. However, MMA partner Matt Fabian noted in a report released Tuesday that the proposal would serve as more of an “accounting scheme” for optics rather than a serious overhaul.
“If implemented, we believe the transaction is unlikely to generate the positive response the state is anticipating from the market participants, including rating agencies,” said Fabian. “We believe that, at best, this transaction delays honestly confronting the pension liability problem.”
New Jersey’s pension system is only 49% funded and Gov. Christie’s proposed $2.5 billion pension payment in his 2018 budget equates to only half of the actuarial required contribution. Fabian notes that the lottery proposal would shift money from the general fund such as higher education and social services and leave a funding gap in the general budget that would number around $970 million for the current fiscal year. Christie has said the lottery transfer plan would up the state’s funded ratio to 64%.
Fabian said Christie’s proposal is at odds with the Governmental Accounting Standards Board rules on the selling of future revenue and may end up worsening the state’s credit quality. New Jersey’s bond ratings are the lowest of the 50 U.S. states with the exception of Illinois due largely to unfunded pensions.
“The state has a long history of shorting its pension system and this transaction may end up doing more of the same,” said Fabian. “If the value of the lottery is less than the $13.5B estimate, then the state’s ARC will likely have been too low and additional payments will need to be made to compensate for that in the future and the pension will also have lost out on the earnings capacity of those funds.”
New Jersey Treasury spokesman Willem Rijksen took issue with the MMA report, noting that the proposal provides a “high quality, revenue producing asset” to the pension system. He added that the lottery’s valuation of $13.5 billion was determined through independent, third-party analysis using conservative assumptions and that the contribution is the strongest commitment the state can make to pensions absent a constitutional amendment.
“If the Lottery performance falls short of expectations, it will be re-valued, and the State’s contribution requirements will be increased accordingly,” said Rijksen. “The benefits of the lottery contribution are not based on accounting and optics, but establishing and funding a tangible commitment to meeting the State’s pension obligations.”