Treasury Assessing Lottery Revenues To Get Clearer Picture Of Pension Funding Shortfall

Gov. Murphy will likely need a plan to make up for sagging Lottery pension contributions in next budget

New Jersey Lottery sales have been mired in a lengthy slump during the coronavirus pandemic, adding to the budget headaches for Gov. Phil Murphy and lawmakers because those revenues help fund public-worker pension benefits.

Initial estimates of the last full year of Lottery receipts fell well short of the total for the same 12-month period last year. The shortfall comes despite a modest rally in sales of Lottery tickets and games taking place over the last few months, according to the state Department of Treasury’s latest report on tax collections.

While the Lottery revenue gap is likely to narrow some as a more thorough assessment is completed in the coming days, just how much remains to be seen, according to Treasury officials.

Any remaining shortfall between what the Murphy administration budgeted for Lottery contributions to the pension system and what was actually collected over the last year will have to be made up with cash from the budget or added to what is already a significant unfunded pension liability.

Meanwhile, the $74 billion pension system itself continues to struggle after the pandemic triggered an economic downturn that helped send pension-fund investment returns into the red in recent months.

New Jersey began dedicating revenues from the state Lottery to the pension system in 2017 under a change enacted by then-Gov. Chris Christie.

Christie’s pension solutions

The policy change was one of several efforts that began during Christie’s two terms to address chronic pension-funding problems that helped to generate an overall unfunded liability easily topping $100 billion at the time.

Other changes included switching to a quarterly payment schedule for making the state’s employer pension contributions, and launching a payment plan that calls for regular increases in the size of the state’s deposits. Murphy is still following that ramp-up plan as the state continues to underfund the full annual contribution set by actuaries.

Since the Lottery revenues were first dedicated to help fund worker-pension benefits, the state has assumed at least $1 billion in annual revenue will flow into the retirement funds from the Lottery. Using that assumption eases how much money has to come out of the budget each year to keep pace with the payment plan launched by Christie.

The setup had been working during the prolonged economic expansion that followed the Great Recession of 2007-2009, and as the Lottery system was adding new games that helped to drive growth. But the pandemic has provided a stiff test as the economy has slowed in recent months, and as many outlets that sell Lottery tickets were impacted by strict social-distancing measures Murphy ordered to help slow the spread of new infections.

Year-over-year monthly Lottery revenues fell off pace by nearly 30% in March, and then by 25% in April as stay-at-home orders went into effect across the state, according to Treasury tax-collection reports. Sales improved somewhat in May and June, with the year-over-year monthly revenue misses reduced to 5%, and less than 1%, respectively.

Still, for the 12 months that ended on June 30, initial revenue figures indicate Lottery proceeds totaled $937 million, nearly 12% below the sum recorded over the same period during the preceding fiscal year.

Lottery has kept to the 12-month fiscal year

And even though Murphy and lawmakers voted earlier this year to extend the 2020 fiscal year by several months to ease budgeting problems related to the pandemic, the financial reporting of Lottery sales as it relates to setting pension funding has remained on the state’s traditional, 12-month fiscal-year cycle.

Assistant Treasurer Dini Ajmani told members of New Jersey’s State Investment Council on Wednesday that the $937 million collected through the end of June was “far short” of the more than $1 billion the Murphy administration budgeted for the Lottery’s fiscal year 2020 contribution to the pension fund.

But she also cautioned that the final figure “will go up” once a deeper assessment is completed. Funds from unclaimed Lottery tickets must be tallied, and the state is also due to receive a contribution from Northstar, an outside vendor that handles some sales and marketing services for the Lottery system under a privatization contract that started during Christie’s tenure, Ajmani said.

It’s unclear how any remaining shortfall would be managed as Murphy is due to present a new budget proposal to lawmakers on Aug. 25.

Ajmani also said the state’s latest quarterly pension contribution was made earlier this month after a short delay, keeping the Murphy administration on the ramp-up plan even as Treasury has had to manage steep revenue losses during the pandemic.

“If all goes well, in October 2020, there will be (another) quarterly payment into the pension fund,” Ajmani said.

Meanwhile, the pension system’s investment returns for the current fiscal year remained in the red through the end of May, according to preliminary figures that were reviewed during Wednesday’s meeting.

Pension system has dropped nearly $6B

Overall, the pension system saw a drop in value from the near $80 billion that was measured before the onset of the pandemic, to just over $74 billion at the end of May. If investment returns hold in negative territory for the full fiscal year, it would mark the first time that’s occurred since 2016.

The investment council — which oversees investment policy for the pension system — also approved a modest change to the funds’ asset allocation during Wednesday’s meeting, bumping up overall stakes in so-called alternative investments, including private equity, to 35% of the portfolio.

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