New Moody’s Investor Services analysis helps frame the Garden State’s recent move to make the New Jersey Lottery an asset of the state’s pension system. The transfer, adopted during budget negotiations earlier this summer, will divvy up state lottery earnings (about $1 billion per year) across the various pension funds. While not a drain on the ailing pension system, the Moody’s report confirms that the transfer hardly moves the needle on New Jersey’s pension crisis—the ostensible reason for the transfer in the first place.
The current public sector pension crisis is a nationwide phenomenon, but New Jersey is one of the hardest-hit states. Currently, the five state-run plans have a reported total unfunded liability of $49 billion and a total funded ratio of 51%. A more accurate measurement of the liabilities puts the unfunded liability at $136 billion, making the systems only 37.5% funded.
New Jersey has committed a number of pension policy “don’t”s over the years. The most egregious of these has been its chronic underfunding in both good years and bad. In a statement on his 8th and final budget, the Christie administrated boasted that, “Governor Christie’s total contributions to $8.8 billion more than 2.5 times the total contributions of all governors combined since 1995.” This is true, but “most” is a relative term—between 2011 and 2017, Christie only made 32% of the required contributions to the plan.
Its assumed rate of return of 7.65% (reduced in 2016 from 7.9%) has been and is still well above the national average and far above what reasonable expectations of market performance would recommend. The 2011 reforms tweaked the benefit structure and suspend cost-of-living adjustment (COLA) payments, but these changes have merely slowed the decline rather than setting the state on a path to securing public employees’ retirement.
Altogether, New Jersey’s pension shortcomings have contributed to eleven credit downgrades on Christie’s watch. In fairness to Christie, while these downgrades have happened during his tenure—and his efforts to save the system haven’t been up to snuff—he inherited the current crisis. His statement that he, “own[s] the credit downgrades” is a rare show of accountability by a public official who could easily pass the buck.
Then again, credit ratings are prospective evaluations that reflect the ability of an entity to pay back its debts, not just statements about the size of an institution’s obligations. By not making the tough decisions needed to right the ship (often in favor of tax cuts or casino subsidies) he and leaders of the New Jersey Legislatures undermined the state’s creditworthiness.
It’s New Jersey’s history of underfunding its pension systems and not taking action to resolve, and not just mitigate, the pension crisis that makes Moody’s pessimistic. Indeed, the lottery transfer and a law recently passed that would require pension contributions to be made on a quarterly basis are, on their own, unobjectionable policies. As the report states, “[p]ositively, the transaction sets a minimum level of pension contributions going forward that is equivalent to annual net lottery revenue and not subject to appropriation” (emphasis added).
Examined through this lens, the lottery transfer addresses, though hardly fixes, the largest problem facing New Jersey’s pension systems: an unwillingness to fully fund the plan. Defined benefit plans can be very expensive, especially if they’re as underfunded as New Jersey’s. It’s estimated that by 2023, the first year Moody’s expects the state to make its full required contribution, the plan will require a contribution of $6 billion per year. The lottery won’t come close to covering it, but it will provide a modest “floor” to the state’s contributions.
Of course, this floor doesn’t mean much if New Jersey strays from its previous commitment to fully fund the plan. Simply put, Moody’s is skeptical that the state has the budgetary wherewithal to properly fund its pension system, especially since the state will either need to finance the programs previously paid for by the lottery with general fund revenue or do without.
As I’ve previously pointed out, fighting over scarce resources could mean the lottery transfer turns into a wash, with the only benefit being a marginal reduction in political risk because of the “floor” provided by lottery revenue.
This extra $1 billion per year isn’t really an “extra” anything. It’s just making sure a small slice of New Jersey’s required contributions come from a more consistent source. Absent a more robust funding policy based on reasonable assumptions or structural reform that dramatically changes the pension system for the better, the lottery transfer is just bailing out the ocean with a bucket.
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