Starting this month, New Jersey’s chronically underfunded public pensions are going to benefit from Lottery funds as well as from more regular payments by the state.

The New Jersey public-employee pension system traditionally has received cash contributions from the state in one lump sum — and only if the annual budget has been healthy enough at the close of each fiscal year to provide the full amount set aside by lawmakers.

But thanks to two recent policy changes that took effect earlier this month with the start of a new fiscal year, the pension system is going to receive more regular cash infusions from the state, and from two different revenue sources.

Monthly contributions will come in from the state Lottery under a complicated new law that was enacted earlier this month by Gov. Chris Christie and lawmakers that effectively transferred the Lottery enterprise into the pension system for a period of 30 years.

In fact, official figures that were outlined during a public meeting of the New Jersey State Investment Council yesterday indicate pension-fund managers expect to receive just over $1 billion throughout the 2018 fiscal year from the Lottery, with monthly infusions averaging $83.4 million.

Quarterly payments directly from state

The pension system is also expecting to receive quarterly contributions of $377 million directly from the state budget under the FY2018 spending plan that Christie signed into law earlier this month. That comes after Christie and lawmakers approved legislation last year that established a new quarterly contribution schedule to replace the lump-sum tradition that’s been followed for years.

The outcome of both payment-schedule changes is that cash for the pension system will go into the $75 billion fund’s numerous investments sooner in the fiscal year, which could be a key factor in years like the 2017 fiscal year, which saw total returns of over 12 percent, according to preliminary estimates outlined yesterday.

“I just think all of this is more responsible and good for the system,” said Tom Byrne, the chairman of the investment council, following yesterday’s meeting. “It’s a huge step in the right direction.” 
Even with the regular cash infusions, the pension system is still expected to run at a net negative of $3.5 billion throughout FY2018. That’s because the $2.5 billion in combined funding the state is planning to contribute via the Lottery and the budget amount to only 50 percent of what actuaries have calculated is needed to keep up with all obligations during FY2018. There’s also still some risk in the new payment schedule since it will ultimately rely on both Lottery revenue projections and state tax-collection estimates holding up through the full fiscal year.

Underfunded by nearly $50B

In all, the pension system is underfunded by nearly $50 billion as of the latest official accounting. This gap has largely built up over the years as Christie and his predecessors from both parties failed to make the full state contributions that have been calculated by actuaries. Making payments at the end of each fiscal year has also allowed the state to use the annual pension contribution as a de facto rainy-day account, such as in 2014, when a sizable state budget shortfall was filled in part with funds that were diverted from the planned contribution into the pension system.

Both the Lottery transfer and new quarterly payment schedule will help to address that issue since money will now be flowing into the pension system on a regular basis from two different revenue streams. And once the money goes into the pension fund, it cannot be withdrawn for other, unrelated purposes. The new state budget also increased the size of the total contribution from the state, from $1.86 billion to $2.5 billion.

That means under the figures discussed yesterday, the state is now on schedule to contribute as much as $626 million during the first quarter of FY2018, which is nearly the full amount the state paid into the pension system in all of 2014 after Christie slashed the payment to offset the budget shortfall.

While Byrne cautioned that the FY2018 contribution will still come up short of the full amount calculated by actuaries, he also suggested the new payment schedule provides a better level of protection for the funds that are earmarked each year for the pension system. “You now have a little more of a guarantee and more certainty, and I think that’s a good thing,” Byrne said.

To make the Lottery transfer work mechanically, the investment council voted yesterday to adopt some technical amendments to its policies. Because the state constitution restricts how Lottery proceeds can be used, the shift will also only benefit the retirement funds for teachers (TPAF), general state workers (PERS), and state-employed police officers and firefighters (PFRS).

Lottery revenues

Under the figures outlined yesterday, 78 percent of the Lottery revenues will go to the teachers’ fund, 21 percent to the general public-workers’ fund, and 1 percent to the police and firefighters. And as a result of the shift, funds from the general state budget are now covering programs that Lottery proceeds have previously paid for, including higher education, veterans, psychiatric hospitals, and programs for the developmentally disabled.

But there are no specific restrictions on how the funds that will be coming into the pension system on a quarterly basis from the state budget over the course of FY2018 can be distributed among the various retirement plans that make up the broader pension system.

Pension officials yesterday also lauded the preliminary investment-return estimates for FY2017, which showed gains of around 12.5 percent net of all fees and other expenses. Those returns are well above the system’s 7.65 percent assumed rate of return, and they also mark a big turnaround from FY2016, when returns came in nearly 1 percent in the red.

“Suffice it to say, it was a very strong and much-needed fiscal year,” said Christopher McDonough, the director of the Division of Investment, the state agency that manages the pension-system’s investments on a day-to-day basis.

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