STUMP » Articles » Stupid Pension Trick: Let's Use Lottery Money! » 18 May 2017, 13:47

Where Stu & MP spout off about everything.

Stupid Pension Trick: Let's Use Lottery Money!  


18 May 2017, 13:47

This stupid trick comes courtesy New Jersey, which has been chock full of stupid pension tricks for years.

They’ve issued billions in pension obligation bonds.

They’ve gone chasing returns alternative assets to try to make up for undercontributions.

So now… what?


Here’s an explainer:

What you need to know about Christie plan to slash N.J. pension debt with lottery cash

Gov. Chris Christie’s administration on Thursday released long-awaited details of its proposal to use state lottery proceeds to boost the government worker pension fund.

In a briefing with reporters, the state treasurer emphasized the impact of the proposal, saying it said would take some of the burden off the state budget to come up with more and more money each year and will do more for improve the shaky pension fund than merely contributing the full amount recommended by actuaries.

The strategy is to inject a $13.5 billion asset into the pension fund and give it a guaranteed source of revenue for the next 30 years.

Here’s what you need to know:

How does it work?

Broadly, New Jersey’s lottery will become an asset of the pension fund, just like all of the fund’s stocks, bonds and other investments.

The state hired an outside consultant to determine the value of the fund, and it came back with $13.5 billion. That would immediately slash the state’s pension debt. Treasurer Ford Scudder said the valuation will be updated regularly.

Over the next 30 years, the revenue generated from ticket sales would add $37 billion to the pension fund. The lottery would revert to the state budget after those 30 years.

Who benefits?

While there are seven pension funds, only three are considered eligible. These are the Teachers’ Pension and Annuity Fund, the Public Employees’ Retirement System and the Police and Firemen’s Retirement System.

What will the impact be on the pension funds?

Overall, the state’s unfunded liabilities — the gap between how much money it has and how much it needs to pay future benefits — will drop from $49 billion to $36.5 billion. The total system will go from 44.7 percent funded to 58.9 percent funded.
Where do lottery revenues go now?

They flow into the state budget. Under the state Constitution, lottery income must be spent on state institutions and state aid for education.

It is expected to bring in $965 million this year, helping fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.

Scudder said those programs won’t be left behind. Once the lottery revenue is rerouted to the pension system, they will be funded out of the state budget.

You can go to the article to see how this fiscal magic is explained, but this is essentially what Jerry Brown is trying to do in California.

This puts me in mind of the personal accounting of Richard Carstone in Bleak House. I’ve used him as an example before:

Reminds me of the “savings” that Richard Carstone of Bleak House keeps referencing when he spends less money than he originally planned on spending… though in both cases, he couldn’t afford the expense at all.


Here we have Richard explaining how much he had saved:

The number of little acts of thoughtless expenditure which Richard justified by the recovery of his ten pounds, and the number of times he talked to me as if he had saved or realized that amount, would form a sum in simple addition.

“My prudent Mother Hubbard, why not?” he said to me when he wanted, without the least consideration, to bestow five pounds on the brickmaker. “I made ten pounds, clear, out of Coavinses’ business.”

“How was that?” said I.

“Why, I got rid of ten pounds which I was quite content to get rid of and never expected to see any more. You don’t deny that?”

“No,” said I.

“Very well! Then I came into possession of ten pounds—”

“The same ten pounds,” I hinted.

“That has nothing to do with it!” returned Richard. “I have got ten pounds more than I expected to have, and consequently I can afford to spend it without being particular.”

Yeah, so they’re going to take away the money from the lottery to spend on the pensions, and magically that’s going to make more money available for the things the lottery money is being spent on now.

FWIW, I saw people talking about this nifty idea back in April, and thought it dumb then.

Here was coverage at the time:

While this was going on, a separate stupid idea, to give control of the pension funds to the unions, was working its ways through the legislature. Christie vetoed that dumb idea, but that one is likely coming back. I’ll treat with it the next time it comes back.

My comment at the Actuarial Outpost on the lottery plan:

This is a dumb idea.

The lottery cash is already being used for something. Moving that cash to the pensions means they have to decide to cut something else. Which they would have to do if they simply said “we’re putting more cash in the pensions”.


It really is that simple.


John Bury remarks on this “clever” plan:

Why the charade?
New Jersey has the worst funded state retirement system in the country and having $13.5 billion appear would allow it to leapfrog Illinois if they don’t follow suit.

But since when are future employer contributions considered assets?

Then there is the question of what will happen to the programs now being funded by the lottery money:

“Once the lottery is deposited in the pension system, it would dramatically decrease the unfunded liabilities, or debt. That would, in turn, eventually reduce the amount of money that needs to be budgeted for the pension contribution.”

Thus the ‘required’ contributions would drop, possibly by more than the $965 million that the lottery money will bring in, freeing up MORE money for those programs.

This ploy is completely unnecessary in New Jersey which has acquired the right to make up their own contribution amounts but it does create a patina of responsibility if those mini-contribution numbers are filtered through the actuarial distortion filter. And that’s why.

Oh jeez, a similar concept as per the California plan.


The pensions that would get this lottery money are all in the Public Pensions Database. Let’s take a quick look at them.

New Jersey PERS had a funded ratio of 60% as of FY 2015, and my cash flow model has it running out of cash by 2031 under a particular set of assumptions: (I will do a full run of NJ pensions later, testing the assumption sets, but for now I’m doing some rough assumptions)

New Jersey Police and Fire had a funded ratio of 73% as of FY 2015, and the cash lasts a little bit longer for them (yes, it’s different assumptions):

New Jersey Teachers had a funded ratio of 51% in FY 2015, and was among my cash flow vulnerable plans.

Spreadsheet that generated the above results.

Those were using FY 2015 numbers from the database, but it seems from this article that the results were even worse for FY 2016. I imagine my cash flow drop-dead dates would be even closer, in that case.


New Jersey is not in a happy fiscal place, so I understand these Hail Mary passes to try to at least reduce the pain.

But this “trick” isn’t going to fix the underfundedness much, just as Gov. Brown’s groovy tactic of borrowing at low short-term rates to buoy long-term needs isn’t really going to do much.

I would say to these people to stop with the messing about, but these are professional politicians. Tricks are what they do. They don’t have anything substantive to offer.

It takes a lot of courage to tell the voters, when your job is on the line, that they are in for a lot of fiscal pain for decades, because past politicians did all these nifty tricks to try to avoid that fiscal pain.

The “lucky” bit is that this pain is going to be felt by the taxpayers, the politicians, the public employees, the public retirees, and the bondholders. Where it will all land, and by how much… well. I guess that’s the excitement of living life.

Looking at my mortality tables, I have a good chance of seeing it all unfold.

Related Posts
Catch-Up Week: Dallas and Houston Pensions - Still A-Roar
Kentucky Pensions Even Closer to the Brink: New Assumptions, New Report
Kentucky Pension Liabilities: Trends in ERS, County, and Teachers Plans