New Jersey’s pension funds will benefit significantly from a new law that mandates irrevocable contributions from the state’s lottery for the next 30 years, according to Kroll Bond Rating Agency.

The state’s lottery has been valued at $13.5 billion; over 30 years, its net revenues are estimated to total about $37 billion.

“The contribution of the lottery commission represents a significant step in reducing the level of the state’s unfunded pension liabilities, which KBRA views as very positive,” Kroll said in a report released Friday. “A consistent pattern of annual contributions that approach and maintain the funding of the actuarially required annual contributions needs to be established in order to fully address the state’s pension issues.”

The New Jersey lottery enterprise has been valued at $13.5 billion.
The New Jersey lottery enterprise has been valued at $13.5 billion. Bloomberg News

"The contribution of the lottery enterprise is a meaningful step toward addressing the state’s substantial unfunded pension liabilities," Kroll said. "As a result of this transaction, the funded ratio of the state’s combined retirement systems has increased from 45% to 59%. The aggregate unfunded actuarial accrued liability has been reduced from $49.1 billion to $36.5 billion, or a reduction of 25.6%."

New Jersey's general obligation debt is rated A by Kroll and A3 by Moody’s Investors Service, A-minus by S&P Global Ratings and A by Fitch Ratings.

Under New Jersey’s Lottery Enterprise Contribution Act, the state contributed the lottery enterprise to its three biggest pension funds -- the Teacher’s Pension and Annuity Fund, the Public Employees’ Retirement Systems, and the Police and Firemen’s Retirement System.

After the lottery’s operating expenses, all net revenues will be distributed monthly to these funds for 30 years. The New Jersey Lottery Commission will see no changes to its operations or legal authority. After the 30 years are up, the lottery enterprise will revert to the state. In the meantime, the lottery commission will collect an estimated $37 billion of net revenues from the operation of the lotteries.

Last month, Lisa Washburn, managing director at Municipal Market Analytics, said dedicating a revenue source for pension obligations was “modestly positive” since it removed a portion of the required payments from budget uncertainties.

Kroll said that while the new law doesn’t force future legislatures to stick to it, changing the law would be difficult since it would be deemed to be a violation of the exclusive benefit rule of U.S. tax law according to the state’s counsel -- and that would likely change the tax-exempt status of the state’s pension funds.

"If that were to happen, the funds and all of the pension beneficiaries would incur additional federal tax liabilities, an outcome that future legislatures would reasonably seek to avoid," Kroll said.

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Chip Barnett

Chip Barnett

Chip Barnett is a journalist with more than 40 years of experience. Barnett is currently Senior Market Reporter for The Bond Buyer.