Moody’s Investors Service recently released a several-page opinion that indicates the accounting maneuver that moved the lottery asset into the pension fund will help, but will not solve the state’s pension crisis. The investor service also called for additional action to keep the system solvent. The opinion was the first since the Governor signed legislation moving the transfer last month.
“New Jersey’s weak and steeply rising pension contribution schedule continues to drive general fund budget pressure,” Moody’s wrote. “Net lottery revenues will replace a portion of state general fund pension contributions, but the incremental cost to the general fund of rising contributions remains the same because net lottery revenues previously funded other general fund expenditures.”
The analysts added that, after 2023, contributions will “ultimately depend largely on future state budget appropriations, as they did before the lottery transaction.”
The transfer of the lottery, which produces about $1 billion in annual revenue for the pension system for 30 years, was projected to accelerate the state’s efforts to reach the full funding level recommended by actuaries. The reason – the $13 billion value of the lottery asset has been added to the books of the pension system, effectively reducing the unfunded liability by the same amount. In essence, the state improved the health of the pension system (and the amount it will ultimately have to contribute) by providing a guarantee of new revenue in the form of the asset.
“The creation of a funding floor is slightly positive for the state’s credit profile because it all but removes the prospect of a complete pension contribution holiday going forward,” the analysts said. “The state’s very weak pension contribution history, including years with no pension contributions whatsoever, is a major driver of its current pension cost and unfunded liability challenge.”
Moody’s did note that skipped or shorted payments would have an adverse impact.
“Further contribution holidays would greatly diminish the assets available to pay pension benefits, and put the state at risk of having to pay pension benefits directly from its general fund,” the report states.