Christie's gamble: Transfer lottery to troubled pension system

Gov. Christie, who rose to national prominence years ago after declaring he had fixed New Jersey's retirement plans, is taking one last shot at shoring up the state's underfunded pension system before leaving office in January.

He wants to transfer the state lottery to the pension system, a move his administration says would immediately reduce the pension debt by $13.5 billion and provide a stable source of revenue for 30 years.

Christie's plan could become law as early as next week, as lawmakers race to pass a budget before the fiscal year ends June 30. New Jersey's pension system is among the worst-funded in the nation; the most recent national study by Pew Charitable Trusts ranked it dead last.

The $73 billion fund covers about 769,000 active and retired public workers.

The administration argues that reducing the unfunded liability, currently $49 billion, would improve the state's credit profile and therefore cut borrowing costs. At the same time, treasurer Ford Scudder told the Senate Budget Committee on June 15, money from the general fund the state usually contributes to the pension would now be available for programs currently funded by lottery revenues, such as higher education.

The lottery plan would mitigate "the fears of bondholders, rating agencies, and public employees," Scudder said. "People are nervous about the certainty of their pension and their benefits in retirement."

He said he didn't see any risk in the proposal, which Christie first announced in February. Legislation was introduced this month.

However, experts say Christie's plan is less a fix than an accounting maneuver. And if, say, in five years revenues don't meet projections and the lottery isn't as valuable as the state thought it was, then the pension debt will actually grow.

If fewer and fewer consumers play the lottery, then pension contributions made based on today's $13.5 billion lottery valuation — determined by an independent adviser hired by the state — will have proved insufficient.

"Let's say you hit another recession. … If that happens, and it has a spillover effect into lottery revenues, that could lead to a situation in which the lottery then basically has less value than it does today," said Leonard Gilroy, director of government reform at the libertarian Reason Foundation.

That means the state's contributions wouldn't be enough to "pay out all of its promised benefits," he said.

The administration says the funded ratio (the ratio of assets to liabilities) for combined state and local plans would increase immediately from 57 percent to 65 percent. A ratio of 100 percent or greater means a fund has enough money to cover all of the payments it owes to beneficiaries.

The funded ratio would increase to 90 percent by 2047, Scudder said.

Christie drew national headlines in 2011 by overhauling the state's pension and health benefits systems, enacting a law that required workers to contribute more to their retirement plans. But he has failed to contribute as much money as he promised under that law, undercutting his signature achievement.

Other states and cities have sold or leased assets to trim their pension liabilities. Former Philadelphia Mayor Michael Nutter tried to sell Philadelphia Gas Works to a private company in 2014 to help pay down the city's pension debt. But City Council shut down the proposal.

Other Pennsylvania cities, such as Allentown, have leased water and wastewater systems for cash — lowering pension contributions and avoiding tax increases.

New Jersey's proposal is different; Christie wants to transfer an asset — not sell it.

"I think you're going to see more of these sales, more of these asset reallocations, more leasing," said Rick Dreyfuss, an actuary in Pennsylvania and adjunct fellow at the conservative Manhattan Institute.

He said any new source of revenue would be good for New Jersey's pension system, but added that the state would have to do more "in order to significantly close the pension gap."

The lottery is one of New Jersey's largest sources of revenue; it generated nearly $1 billion for the state in fiscal year 2016, funding programs for the developmentally disabled, school nutrition, tuition aid, and disabled soldiers.

Yet lottery revenue growth has been essentially flat in recent years, generating between $950 million and $987 million since fiscal year 2012. "The relative lack of growth in the State Lottery Fund transfer is largely the result of lottery net income developments that appear to have been part of a broader national trend," the nonpartisan Office of Legislative Services wrote in an April budget analysis.

"Specifically, higher-margin draw-game ticket sales, Mega Millions and Powerball, have been declining, while lower-margin instant-game ticket sales have been increasing."

The plan would be budget-neutral for the first five years: Some of the money the state usually appropriates from the general fund to the pension system would be available for programs currently funded by the lottery.

Thereafter, the budget would take a bit of a hit. That's because the state won't make the full actuarially recommended contribution to the pension system until fiscal year 2022, under its current funding schedule. Christie has proposed a $2.5 billion contribution for fiscal year 2018, which begins July 1.

Each year the state doesn't make a full payment, it accrues more debt, which it must pay down later. That means the state would have to dip further into the general fund to meet its pension obligations — and possibly crowd out funding for other programs, absent new sources of revenue.

Of course, that would happen even without the lottery contribution.

The Christie administration projects that the state will climb out of that budget hole by fiscal year 2030.

There are legal constraints on how the state can spend lottery revenues. The state constitution says lottery proceeds must be dedicated to "state institutions and state aid for education."

In a legal opinion issued in May, New Jersey's attorney general, Christopher S. Porrino, said the contribution of the lottery to the pension system "comports with the state constitution and other applicable state laws."

The biggest share of the lottery allocation would go to the Teachers' Pension and Annuity Fund, which experts say could go insolvent in a decade without reform.

The New Jersey Education Association, the state's largest teachers' union, is taking a neutral position on Christie's proposal.

"The commitment of a billion dollars of funding guaranteed for a 30-year period to offset the pension liability is a significant commitment," NJEA executive director Ed Richardson told lawmakers this month.

But he said the union was skeptical the state would make good on that promise.

"The only risk," said State Sen. Steven Oroho (R., Sussex), "is people don't necessarily trust us – government in total" – because of past fund diversions.