Truth Behind NJ Lottery Gimmick

New Jersey Treasurer Ford Scudder appeared before lawmakers yesterday to make a pitch for the administration’s proposal to use the revenue-generating state Lottery to help prop up New Jersey’s beleaguered public-employee pension system. As njspotlight reported:

The bill was only put up for discussion yesterday, and several lawmakers praised the proposal, including the bipartisan sponsors of the legislation. But Sen. Jennifer Beck (R-Monmouth) suggested she’s hoping to hear from Wall Street rating agencies before making a final decision on the measure, which the Christie administration is looking to enact by July 1.

………

“I don’t really see there being a risk to this. It’s going to improve our funded ratios tremendously, such as our investors are going to see us having improved our fiscal situation,” Scudder said. “At the same time, we’re not impacting programs funded by the Lottery, so I don’t really see negatives to this.”

………

Beck, the GOP senator, said she would like one of the major Wall Street rating agencies to weigh in before any final votes on the bill are cast. Scudder said Treasury has been updating the rating agencies on the proposed transfer, but has yet to provide them with a formal presentation.

“I certainly would feel more confident if I knew that those that are doing this on a regular basis, and those that do this kind of analysis for a living, embrace this,” Beck said. “It would be nice to know now, if possible.”

That analysis was done here but I fear:
.

.
If not, here it is:

The primary role of public plan actuaries is to keep contributions as low as possible with whatever gimmicks they can dream up. The idea that an asset within a pension plan is more valuable than the same asset outside of it is patently absurd except when you understand that when it is in the plan actuaries can assign whatever value they want to that asset and not get challenged either by other actuaries who have no reason to do any challenging or politicians and plan trustees who, for the most part, not only lack relevant knowledge, experience, and incentive but are often the ones who dictate to the actuaries their role.

60 responses to this post.

  1. Posted by skip3house on June 16, 2017 at 12:21 pm

    “At the same time, we’re not impacting programs funded by the Lottery, so I don’t really see negatives to this.” …and how can this be?…..’ patently absurd except when you understand that when it is in the plan actuaries can assign whatever value they want to that asset’

    Reply

    • Posted by Anonymous on June 16, 2017 at 2:41 pm

      The homeowners will pick up the tab …it will just be lopped onto property taxes ,likethe fake open spaces fund …it’s all a gimmick to these guys ..what next ..?give the parkway to the pensions and let the collected tolls go directly to the pensions and make the towns responsibly to maintain the roads …

      Reply

      • Posted by Anonymous on June 16, 2017 at 3:08 pm

        It’s a game …………..

        With the Lottery money dedicated to the Public Sector pensions, NJ’s Elected Officials won’t have to ADMIT that they are raising taxes to fund NJ’s ludicrously excessive and unnecessary pensions.

        They’ll now say tax increases are necessary to maintain the services that the Lottery revenue paid-for BEFORE being diverted.

        Reply

        • Posted by Anonymous on June 16, 2017 at 3:45 pm

          Or cut all the corporate give aways financed through the NJEDA debt w/o taxpayer approval to fund existing lottery programs.

          Reply

          • Posted by Anonymous on June 16, 2017 at 4:09 pm

            I’ve wondered whether we (NJ) gets fair “value” from such tax-relief-deals …. tax breaks for increasing or bringing new jobs into the State (or staying rather than moving to a lower-cost State).

            I’d certainly like to see an analysis of the last 10-years’ deals to see if these deals made financial sense…… noting that doing so is fraught with guesswork (e.g., what % of companies that threaten to leave if not given a tax break would actually leave if they didn’t get it, or what percentage of companies that say they would ONLY move to NJ WITH a tax-credit deal would have moved here even without such a deal?)

          • Posted by Anonymous on June 16, 2017 at 4:13 pm

            And to be fair well beyond to see if their workers stay in NJ or leave -similar scenario as public retiree’s moving, etc…..

          • Posted by Anonymous on June 16, 2017 at 4:29 pm

            Well the companies are dealing from a position of strength …so many big companies do just pick up and leave ,so the state is between a rock and hard place …I read where the state need a annual growth of 3 to 4% to fund it’s debt and programs …we’re at 1.5% the last few years .The state is desperate to keep it’s residence from leaving (at least the one’s with money) that was the only reason the income tax was cut for seniors and the Death tax threshold was raised …we won’t really know if that worked for a couple of years ..If Murphy gets elected and throws that out I believe the exit from the state continue and speed up as more of the state grow older ….

          • Posted by Anonymous on June 16, 2017 at 5:06 pm

            Quoting Anon ……… “so the state is between a rock and hard place”.

            That supposed “hard place” is simply growing the balls to telling the Unions it game over……….. all Plans FROZEN starting “tomorrow”, and going forward, you’ll get SS plus a 401K-style DC Plan with a 3%-of-pay taxpayer “match” …….. and ZERO towards retiree healthcare……………. just like Private Sector Taxpayers typically get from their employers.

  2. Posted by Analyst on June 16, 2017 at 12:22 pm

    From a financial analysis standpoint , what is wrong with counting future contributions as an accounts receivable and an asset ? When these funds are deposited , aren’t they used to pay off current benefits ?

    Future revenues are counted towards calculating a coverage ratio . Future earnings are used to understand the ability to pay a mortgage.

    I am not supporting what I understand of this lottery asset transfer , but I would be curious what the rating agencies say about it . I would also be curious what would need to be paid out in lottery winnings and programs . It would seem that these liabilities would have to accrue to the pension fund as well. If this creates a net positive for the pension fund and the state , then it seems worth exploring .

    Reply

  3. Posted by S Moderation Douglas on June 16, 2017 at 3:32 pm

    Almost all states (and many multi- employer and single employer pension plans) are in deep trouble today.

    A big contributor is the Greatest Recession. Also rosy investment projections in many cases.

    New Jersey and Illinois are neck and neck for the title of “worst funded”. For the same reason as most other states …plus… the big one:
    …………………
    Illinois Pension Watch: This is Why Your Pensions are in Trouble
    by meep

    24 February 2016, 22:00
    I’ll give it away at the beginning: they’re in trouble because they’re not making the “required” contributions to the pensions.

    Yes, there are all sorts of other reasons as well, such as spiking, early retirements, sluggish payroll growth, optimistic valuation assumptions, etc.

    But ultimately the reason the pensions are so little funded is because the state didn’t put in enough funds.

    And they knew it.

    They knew it for years.

    It’s not because of investment fees, though those should be more transparent. It’s not because of part-time board directors who get a lifetime pension for very little work, though that doesn’t help. (I’ll address why these aren’t significant problems in a later post.)

    DON’T PAY THE BILLS, THE DEBT GETS LARGER
    …………………

    “ludicrously excessive and unnecessary pensions.” is nonsense.

    Reply

    • Posted by Anonymous on June 16, 2017 at 3:58 pm

      Quoting SMD………….

      “But ultimately the reason the pensions are so little funded is because the state didn’t put in enough funds.”

      True, but wouldn’t we be hearing the SAME thing (from the supporters of Public Sector pensions) if the the currently promised pensions were 2, 5, or even 10 times MORE generous (than the already excessive levels they are today) …..”You’re not paying enough” !

      You CANNOT divorce the funding from the Plan’s “generosity” …. because they are in lock-step. A very generous Plan will ALWAYS be very costly, and hence very difficult to fully fund,

      “Funding” isn’t the driver, Plan GENEROSITY is…………… and Public Sector pensions are WAY WAY WAY too generous (by every reasonable metric).

      Reply

      • Posted by skip3house on June 16, 2017 at 4:42 pm

        Why keep using logic? See how they got around NJ Constitution for $600 million to fix capital building,…….? (capitol?)

        Reply

        • Posted by Anonymous on June 16, 2017 at 4:55 pm

          Quoting …… “Why keep using logic? ”

          Yup, and especially when responding to SMD.

          *************************************

          Quoting …………… ” See how they got around NJ Constitution for $600 million to fix capital building,…….?”

          And the dopey Judge just dismissed the suit to shut it down, because they have already sold the bonds ????

          How reduclous, and deciding on it’s merits ……… and ordering an unraveling of the bond deal as illegal and unenforceable?

          Reply

          • Posted by skip3house on June 16, 2017 at 5:00 pm

            inside job/deal? Delay court proceedings until I get bonds sold?

          • Posted by Anonymous on June 16, 2017 at 5:05 pm

            100% right skip3 …I would love to put the question to the candidates (Murphy & Giordano) if elected would they repudiate the illegal debt .

          • Posted by skip3house on June 16, 2017 at 5:09 pm

            Ask them, please. By the way, one of my kids called and said for me to use ‘ capitol, dopey ) Probably meant to say Dad.

          • Posted by Anonymous on June 16, 2017 at 5:34 pm

            I’d like to ask Murphy just how brown his lips have become from kissing Union ass.

          • Posted by Anonymous on June 16, 2017 at 5:45 pm

            I’d say they’re light beige right now but colors change just ask our brown nose Gov….

    • Posted by Anonymous on June 19, 2017 at 8:17 pm

      SMD. In all fairness the pensions were a huge mess way before the Great Recession…….,that just brought the problem to the fore front and it has been downhill ever since

      Reply

  4. Posted by S Moderation Douglas on June 16, 2017 at 5:40 pm

    “Yup, and especially when responding to SMD.”

    wouldn’t we be hearing the SAME thing if the the currently promised pensions were HALF as generous as they are today? …..”You’re not paying enough” !

    http://pension360.org/chart-a-history-of-new-jerseys-pension-payments/

    Reply

    • Posted by Anonymous on June 16, 2017 at 6:28 pm

      LOL ………….

      You’re correct, because RIGHT NOW, with Public Sector pensions ROUTINELY 2 to 4 times (4 to 6 times for Safety workers) greater in value upon retirement than those typically granted comparably situated Private Sector workers, if Public Sector pensions were HALF as generous and we were fully funding them, Taxpayers would STILL be contributing more than necessary, just, or fair.

      Reply

  5. Posted by Mike on June 16, 2017 at 5:54 pm

    There is a sort of historic parallel to what could happen here. In 1997, NJ issued a bond for $2.75 bn and placed all of that money into the pension funds.

    There were a couple of results in the years following 1997 that might echo in this year’s discussions among the politicians regarding 2017….
    – The funded ratio will increase (assuming of course that the PV of future Lottery earnings can be considered an asset today).
    – Future required contributions will be lower than they would have been

    But there was another effect in the years following 1997 that I bet will also echo in 2018 & later….
    – NJ made no budget provision for pension contribution that year, and only minimal budget provision in following years. In some ways the massive underfunding of NJ pensions STARTED when they made a massive contribution that justified taking pension costs out of the budget.

    One other thought….while I think putting the Lottery into the pension funds is silly, it is way way way better than, say, selling the Lottery to Wall Street and placing the proceeds into the funds. Chicago took the route of selling off its parking meter revenue, and got thoroughly hosed in the process. At least NJ would avoid that fate.
    .

    Reply

    • Posted by Anonymous on June 16, 2017 at 6:56 pm

      The biggest problem for Taxpayers accompanied those 1997 changes. I believe that a contractual guarantee was put in place that FUTURE service pension accruals would not be reduced for vested Plan participants.

      If so, a Constitutional Amendment may be NJ’s only avenue to do so.

      I cannot say this more emphatically ……. if NJ is to have ANY (yes ANY) chance of working it’s way out of the financial hole we are now in, we must VERY materially reduce the FUTURE Service pension accruals for CURRENT workers (and VERY materially cutback retiree healthcare subsidies for both active and retire workers).

      Reply

      • Posted by Anonymous on June 16, 2017 at 7:28 pm

        No matter what your self interested opinion is on this matter your analogy is right on the mark – no more wasting time talking, it’s time for action!

        Reply

        • Posted by Anonymous on June 16, 2017 at 7:49 pm

          Other than being a well-informed, finally-educated, and fed-up* NJ Taxpayer, I have ZERO self-interest …… nor do I (or would I) earn make ANY money from the Public Sector pension/benefit reforms that I strongly support.

          _________________________________________________________
          * with the enormity of the financial rip-off being perpetrated upon NJ’s Taxpayers by the Public Sector Unions and our Union-OWNED Elected Officials.

          Reply

          • Posted by S Moderation Douglas on June 16, 2017 at 11:31 pm

            “well-informed”

            Laughing Out Loud

          • Posted by Anonymous on June 17, 2017 at 12:04 am

            Indeed ….. and unlike you, my work responsibilities have never included changing light bulbs.

            You’re just one of the legions of insatiable greedy Public Sector workers/retirees with an oversized sense of entitlement.

  6. Posted by S Moderation Douglas on June 16, 2017 at 11:49 pm

    “It ain’t ignorance causes so much trouble; it’s folks knowing so much that ain’t so.”

    attributed to Josh Billings with variants

    Anonymous (the one with the obstinate caplocks key) is a veritable font of misinformation and unfounded opinions.

    Reply

    • Posted by Anonymous on June 17, 2017 at 12:17 am

      Just read the daily headlines at pensiontsunami.com

      The world isn’t wrong and you are right.

      Reply

  7. Posted by S Moderation Douglas on June 17, 2017 at 1:20 am

    For starters, give us the source for this…

    Posted by Anonymous on June 10, 2017 at 10:03 am

    Fine with me as long as it’s across the board for ALL jobs. For every 1 job where a Public Sector worker is found to be compensated less than their Private Sector counterpart, there will be 50 jobs where Public Sector workers are found to be overcompensated…

    Alternative facts, Ms. Information?

    Reply

  8. Posted by Anonymous on June 17, 2017 at 2:11 am

    Lets take a pole ……………

    http://www.ocregister.com/2017/06/16/unions-try-to-make-it-harder-for-local-governments-to-make-pension-payments/

    After reading the above article, are Public Sector Unions anything but a CANCER inflicted upon Civilized Society ?

    Reply

  9. Posted by S Moderation Douglas on June 17, 2017 at 2:18 am

    Table 4 page 60 says nationwide 60% of state workers are either underpaid or roughly equal.

    1 in 50 is BS.

    Don’t quit your day job.

    Reply

    • Posted by Anonymous on June 17, 2017 at 2:59 am

      You’re always deceiving the readers………..

      Table 4 (i.e. “paid”) is WAGES alone.

      My statement addressed “Total Compensation” (in Figures 6 and 13, as noted above) which includes Wages + Pensions + Benefits.

      You’re such a putz !

      Reply

  10. Posted by S Moderation Douglas on June 17, 2017 at 5:23 am

    Now you’re just embarrassing yourself. We’ve done this before. That time you at least had the decency to admit you were wrong. Table 4 includes pensions and retiree healthcare.

    1 in 50 is ludicrous. You pulled a “fact” out of your rear and played with it till it got bigger. Not the first time, and instead of correcting your statement, you double down on stupid. How very Trumpian of you.

    “Lets take a pole ……………”

    ???

    Reply

    • Posted by Anonymous on June 17, 2017 at 1:25 pm

      SMD,

      Because YOU said ……….. “Table 4 page 60 says nationwide 60% of state workers are either underpaid or roughly equal. ” ………. I didn’t go back and look at Table 4, assuming that you were correct and that Table 4 related to “paid”, meaning “wages” alone.

      Looking at Table 2, the ONLY educational categories where there is statistically credible evidence that Public Sector workers are “compensated” less than their Private Sector counterparts are the Professional and PHD categories with both totaling only 3% of all Public Sector workers………… big whoop.

      I work with MANY “professionals ” (many with advanced/professional degrees and some with PHD’s), and in my experience, 60+hr workweeks are COMMONPLACE. While I am unaware of any statistics detailing typical hrs/wk worked by Public Sector Professionals & PHDs, I find it difficult to believe that they TYPICALLY work 60 hrs/wk. If you work fewer hours (or are less productive) you DESERVE proportionately less compensation. Stated differently, LOWER-compensation because you worker fewer hours does NOT equate with UNDER-compensation.

      Reply

      • Posted by S Moderation Douglas on June 17, 2017 at 2:10 pm

        ” I didn’t go back and look at Table 4, assuming…”
        You do that a lot.

        Posted by S Moderation Douglas on June 17, 2017 at 2:18 am
        “Table 4 page 60 says nationwide 60% of state workers are either underpaid or roughly equal.”

        “either underpaid …or roughly equal…”

        According to Biggs… ” Total compensation for bachelor’s degree holders is about even with
        private sector levels.”
        …………………………………………………..
        “about even with” as in

        …not…

        “GROSSLY EXCESSIVE, unnecessary, unjust, unfair to taxpayers, and clearly unaffordable pension (AND benefits)”

        Yes… “big whoop.”
        ……………………………………………………….

        As I said, we have covered this before. I “assumed” you might remember, or should have figured it out for yourself years ago. It is too bad, you actually have some good points, but are your own worst enemy. I normally try to be more tactful, but it is evident you are either a fool or a liar. Or both.

        Reply

  11. Posted by Anonymous on June 17, 2017 at 11:34 am

    • Posted by Anonymous on June 17, 2017 at 11:41 am

      Or should I say depletion rate…..

      Reply

    • Posted by skip3house on June 17, 2017 at 11:50 am

      How about a list of all politicians, and the like, who first allowed all these unfunded promises? Let them alone comment. One told me about 2002 ‘better to have promises than nothing’

      Reply

      • Posted by Anonymous on June 17, 2017 at 12:10 pm

        Honest, promise?

        Reply

      • Posted by Anonymous on June 18, 2017 at 3:26 pm

        “One told me about 2002 ‘better to have promises than nothing’”

        Timing is everything. In 1980s California, as I understand, CalPERS was even more underfunded than today. Overfunded by 1999, underfunded in 2004, 100% funded in 2007, then… The Great Recession.

        May be trying to close the barn door after the cows got out, but a lot of people agree defined benefits are worth saving, with more safeguards.

        At the time, what are now called “unfunded promises” may have been the logical, correct choice.

        There are three possibilities…

        1) The promises were too big to begin with.

        2) The promises were reasonable, but not properly funded.

        3) All the above.

        Can’t really blame a politician who thirty years ago approved a reasonable pension which subsequent legislatures or governors failed to fund properly.

        Maybe we have learned enough in the last ten years to fix the barn door, and try to get our cows back. Some are gone for good. We either need to replace the cows, or just blame the victims.

        Reply

        • Posted by Anonymous on June 19, 2017 at 4:31 pm

          Blame the CA Elected Officials who colluded with CalPERS & the Unions to sneak in SB400 (doubling some pensions RETROACTIVELY), while ignoring the actuary’s report that things might go really badly……….. as they indeed did.

          BUT ………… aren’t the workers the financial beneficiaries of those fraudulent deals ……. vi those RETROACTIVELY increased pensions ? Sure are, so THAT is where Taxpayer’s must look to right this wrong, by reneging on 50+% of those fraudulently generated “promises”.

          Reply

  12. Posted by Anonymous on June 17, 2017 at 1:28 pm

  13. Posted by Anonymous on June 18, 2017 at 9:18 am

    Happy Father’s Day to all you Dad’s and Dad wannabes.

    New post please I’m bored and need some entertainment!

    Reply

  14. Posted by MJ on June 19, 2017 at 11:50 am

    John, if the lottery funds are transferred to the pension funds, what happens if someone wins a huge lottery windfall.. if memory serves, this has happens in NJ quite frequently…..and what happens to any services resources the lottery funds are currently funding? Programs cut? Higher taxes??

    Reply

    • Too many issues to speculate about. Will the pension also get the lottery assets currently? Are those investments still going to be in Treasuries? Will pension trustees get to decide on any expansion or limitations on lottery gambling?

      Reply

      • Posted by Anonymous on June 19, 2017 at 2:01 pm

        While I don’t support turning over the lottery to the NJ Pension Plans for 2 reasons*, giving Nj Pension Trustees access to Lottery assets now backing winning Annuity payout could be ANOTHER disaster for NJ. I can see the pitch right now…….. the Treasuries are ridiculous. Lets load up on alternatives. And right at a market peak. What could possibly go wrong?

        * (1) it reducee the urgency to address the ROOT CAUSE of the NJ pension mess….. that NJ’s pension “promises” are WAY too generous and must be materially reduced for the FUTURE service of all CURRENT workers, and

        (2) while I believe counting the lottery as an asset (given that it reverts to the State in 30 years) violates just about every account standard in existence, it wouldn’t surprise me if NJ did so anyway. For certain Local Plans, that might enable reinstatement of COLAs far sooner than would be the case in the absence of this phony slight-of-hand deal

        Reply

        • Posted by Mike on June 20, 2017 at 6:57 pm

          I hadn’t considered this route to disaster. Come to think of it, why doesn’t NJ already do this? Are they mandated to invest lottery annuity money into treasuries? I understand that this sort of thing is how the payout amount is calculated…but after that, gee.

          Reply

          • Posted by Anonymous on June 20, 2017 at 9:04 pm

            I suspect than most people look at the Lottery “Annuity Value” (i.e., the sum of the 30 annual payouts) and “Lump Sum” figures in the wrong direction, thinking that the Annuity Value comes first and the Lump Sum value is calculated FROM the Annuity Value.

            That’s not the way it works. Most lotteries KEEP (for the State) about half of the cash lottery receipts, with the balance paid out in prize money (split in some specified way between the top prize and the smaller ones). So, based on new ticket sales (and perhaps a roll-over of unpaid-out cash from no-top-winner in the prior lottery), the lottery knows the dollar amount in upfront cash available for the 1-st prize. THIS is the Lump Sum Amount.

            The Annuity Value is THEN determined as the sum of the 30 level annual payments (made at the beginning of each of 30 years) which when discounted at a specified interest rate equals that Lump Sum, or in formula form (where LS = Lump Sum, AAP = Annual Annuity Payment, and i = interest rate):

            LS =AAP + AAP/(1+i) + AAP/[(1+i)^2] + AAP/[(1+i)^3] + …. + AAP/[(1+i)^29]
            which is equivalent to:

            LS = AAP [(1-(1/(1+i))^30]/(i/(1+i))

            So, to determine AAP, you plug in your known value of LS, your chosen interest rate i, and solve for AAP by re-arranging the equation to:

            AAP = LS/{[(1-(1/(1+i))^30]/(i/(1+i))}

            Once you have determined the Annual Annuity Payment (AAP), the Annuity Value published by the Lottery is simply 30 x AAP.

            For what it’s worth, the 6/21/17 Powerball is showing an Annuity Value of $64 Million and a Lump Sum Value of $40.1 Million. Using the formulas shown above, you can SOLVE for the annual interest rate which equates these 2 values (albeit solving for “i” when you know both LS and AAP is more complicated and requires either the use of a financial calculator such as the HP-12C, or using the “Goalseek” function in Excel along with a first “guess” at the value for “i”). If you did so, you would find that i = 0.0350205258273954 (or roughly 3.5%). This is higher than current treasury rates, so I suspect that it is the rate that the financial markets are assigning to very secure liabilities with level payouts over 30 years ….. perhaps even quotes from Financial entities willing to take to Lump Sum and guarantee the AAP payment stream.

            ********************************

            Those that can, DO. Those that can’t, change light bulbs.

          • Posted by Mike on June 20, 2017 at 9:49 pm

            Whoa my man you are off on your own riff here. Yes the math is known and Excel or a calculator can do it. And apparently the implicit interest rate is higher than treasuries.

            I still wonder whether NJ could take the annuity money and invest it differently, keeping the profit once the 30 payments were made (or sooner? why not?)

          • Posted by Anonymous on June 20, 2017 at 10:05 pm

            The enabling Law, or perhaps the Lottery Rules rules may address how the Lottery must invest the assets associated with yet-unpaid-out annuity payments …… assuming the lottery doesn’t immediately “sell” them to the (qualified) bidder offering the highest interest rate (to get the HIGHEST Annuity payout stream from the already know Lump Sum).

            Assuming the lottery keeps and invest the assets, SHOULD THEY take the risk of coming up short ….. when there is no NEED to do so…. because the lottery ticket buyer is told upfront exactly what the payout will be on both the Lump Sum and Annuity basis ?

            UNNECESSARY risk (and it is indeed and UNNECESSARY risk in this instance) is not a good thing.

          • Posted by Mike on June 21, 2017 at 2:16 pm

            Yeah I agree that taking such a risk would be stupid, as my original post makes clear. I really am wondering whether NJ might choose to do this if the idea were proposed.

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