New Jersey’s plan to transfer lottery revenues toward pension funding fails to tackle the state's immediate liability woes, according to Moody’s Investors Service.
Legislation signed by Gov. Chris Christie last month shifts shifts roughly $1 billion of annual New Jersey Lottery revenues from the state’s general fund toward pensions for 30 years. Moody's analyst Baye Larsen said in a report released Monday that despite the new funding flow, a majority of future pension contributions are subject to appropriation. She notes that annual pension contributions will not “increase significantly” since lottery revenues will largely replace planned contributions that otherwise would have derived from the state’s general fund.
“New Jersey's weak and steeply rising pension contribution schedule will continue to drive general fund budget pressure in the future,” Larsen said in the Aug. 16 Moody’s report. “Net lottery revenues will replace a portion of state general fund pension contributions, but the incremental cost to the general fund of rising contributions remains the same because net lottery revenues previously funded other general fund expenditures.”
Though the plan shifts funding responsibility, Larsen said, the transfer’s projected net effect on the general fund budget and on total pension contributions will be neutral for the first five years since the state plans to maintain its phased contribution schedule. This creates “considerable risk” of the state’s ability to afford rapidly growing pension contributions absent the implementation of structural revenue or spending changes, she said.
Larsen said the plan brings “some positive developments,” such as establishing a minimum contribution level. The legislation also adds $5.7 billion of aggregate contributions to the state's pension funding plan for fiscal years 2023 and beyond.
“The creation of a funding floor is slightly positive for the state's credit profile because it all but removes the prospect of a complete pension contribution holiday going forward,” said Larsen. “The state's very weak pension contribution history, including years with no pension contributions whatsoever, is a major driver of its current pension cost and unfunded liability challenge.”
While the lottery floor only covers 25% of the state’s actuarially required contribution, Larsen said a statutory update to the state's contribution formula is another potentially positive element of the program. Larsen said the new formula is projected to generate $5.7 billion of additional contributions in 2023 and later that target a 90% funded ratio by 2047. Pension reform legislation in 2012 targeted an 80% funded target.
New Jersey’s strategy is part of an emerging trend to access different revenue dedications to boost pension funding. Larsen noted that recent examples include a future sales tax dedication in City of Jacksonville, Fla. and Pittsburgh using dedicated parking revenues to improve statutory funding levels. Portland, Ore. also funds a largely unfunded pension plan closed to new employees on a pay-as-you-go basis with a dedicated property tax.
New Jersey has the second lowest Moody’s credit rating at A3, largely due to the state's high pension burden.