Lottery Asset Lie

Governing calls it creative:

In New Jersey, the state is pledging its lottery — which an outside analysis determined was valued at $13.5 billion — as an asset to state pension funds. The action would reduce the pension system’s $49 billion unfunded liability and improve its funded ratio from 45 percent to about 60 percent, according to State Treasurer Ford Scudder.

It is also a gimmick testing the limits of stakeholder credulity.

Excerpts from the new law starting with a definition on page 5:

“Special asset” means the Lottery Enterprise, including the operations account but excluding the investment account.

It is not the lottery itself that is being turned over to the pension system but the proceeds from the lottery which the state will recoup by shorting pension contributions some more yet we have on page 10:

For the purpose of this subsection, the funded ratio shall be the ratio of the actuarial value of assets plus the value of the special asset, determined in accordance with section 38 of P.L.2010

So the funded ratio goes up but on page 18 we have:

The contribution shall be computed by actuaries for each system or fund based on an annual valuation of the assets and liabilities of the system or fund pursuant to consistent and generally accepted actuarial standards and shall include the normal contribution and the unfunded accrued liability contribution. Notwithstanding the provisions of any law to the contrary, the assets to be included in the calculation described in this paragraph shall not include the special asset value.

The proceeds from the New Jersey lottery over the next 30 years could have a present value of $13.5 billion but the New Jersey pension system can neither sell that asset nor use it to calculate contributions. All it can do is pretend it is there to placate the conveniently gullible. The Governing story concludes:

The move hasn’t impressed credit rating agencies, either. In recent years, they have repeatedly lowered New Jersey’s rating in part because of its increasing unfunded pension liabilities. “It’s not a cash infusion,” says S&P Global Ratings analyst David Hitchcock. What’s more, he says, the state runs the risk of assuming its assets “are better than what they really are.”

The state runs no such risk. This scheme is specifically designed to assume assets “are better than what they really are.” Those running real risks are taxpayers, public employees, and retirees who believe this state.

10 responses to this post.

  1. Posted by Anonymous on July 20, 2017 at 1:36 pm

    This was pretty oblivious from the get-go.

    On 6/26 (on this Blog …….. “NJ Pension Lottery: Reporting Lies”) I posted a comment highlighting a conveniently overlooked problem:
    ***************************************************

    Posted by Anonymous on June 26, 2017 at 4:49 am

    One fact about this Lottery proposal (and it’s implications) seems to have escaped being fully reported.

    The proposal is for the lottery income to flow into the Plan for 30 years, starting at just under $1 Billion in year 1, and with the income increasing by somewhere between 1.2% and 1.6% annually over the 30 years.

    Additionally, the Present Value of that (slightly increasing) 30-year income stream has been estimated (by an independent firm) to be $13.5, that amount being the presumed addition to the pension Plan assets (hence increasing the receiving Plans’ funding ratios) upon approval of this proposal.

    But here’s the quirk…………

    Unlike most assets, that maintain or grow in value almost INDEFINITELY, this proposal calls for the Lottery to revert to the State at the end of 30 years……….. meaning that this $13.5 Million Asset doesn’t grow larger, but declines to ZERO at the end of the 30-th year……….. with that decrease down to zero (mostly heavily impacting the last 15 of the 30 year period*).

    What this means is that (unreported in any Article that I have seen) once this proposal gets past year 15 (and especially once past year 20) the beneficial impact of each year’s lottery income is … to a growing extent … OFFSET by annually having to write down the value of the underlying asset producing that income.

    * If the annual income stream was a LEVEL ANNUAL $1 Billion, the $13.5 would decreases in value starting in year 2, with a remaining-asset pattern similar to that of the remaining Principle on a 30 year home mortgage. In this case, because we are discounting a stream of annually INCREASING income the $13.5 Billion asset will actually INCREASE (although very slightly for about 4 years and then start to SLOWLY decrease, with there being very little change from the year one asset value of $13.5 Billion over the first 10 years. After year 10, the decline in asset value accelerates eventually to $0 at the end of the 30-th year.

    Reply

  2. Posted by George on July 20, 2017 at 2:59 pm

    This scheme is specifically designed to assume assets “are better than what they really are.”

    Does anyone with a professional designation have to sign off on that? I wonder what the NJ Dept of Investments will do with it?

    Reply

    • Posted by Anonymous on July 20, 2017 at 3:32 pm

      My concern is that if funding ratios do improve somewhat (especially for the Local Plans), they will count these phony assets in trying to reinstate the COLAs. THAT is REAL money (not just “timing” of when/who pays for the real cost of promised benefits).

      That might get me so pissed, that I might volunteer to act as a citizen-plaintiff (assuming someone would pick up the legal bills) in challenging the inclusion of the Lottery proceeds as countable Plan assets in the funding ratio calculation for COLA-reinstatement purposes.

      NEVER underestimate the filthy/underhanded dirty tricks of a Public Sector Union.

      Reply

  3. Posted by boscoe on July 20, 2017 at 3:31 pm

    I argued something along these lines recently on another blog, maybe not as eloquently as Anonymous. Here’s what I don’t understand: has anyone actually seen the formal proposal, pitch, actuarial analysis — whatever you want to call it — that supposedly rationalized this scheme? This wasn’t dreamed up in the Treasurer’s office, this had to have been marketed to the state by someone with the patina of authority. I’ve seen nothing except the Treasurer’s vague “trust us” testimony.

    There’s another thing: this scheme is not being implemented through a constitutional amendment or even a public question. It’s a simple law, a statute — which means it can be undone by another law in a different Legislature at any time. What happens then?

    Reply

    • Posted by Anonymous on July 20, 2017 at 3:47 pm

      It certainly wouldn’t be undone by Phil Murphy (likely, NJ’s next Gov.)……….. his head being so stuck so far up the Public Sector Union asses.

      Another rich Guy (ala GovCorzine) selling his soul to BUY the votes (the block Public Sector Union votes) to achieve his political ambitions.

      Reply

    • The report is likely a simple present value calculation of how much a billion dollars annually coming in for 30 years is worth. Just as the billion dollars in reduced contributions laid out in the law would have about the same value.

      The state could ‘donate’ the receipts from insurance premium taxes or the sales tax and if someone valued that stream of income at $35 billion it would bring the state portion of the plan to 100% funding in Ford Scudder’s world though the state would make up the lost revenue by reducing their contributions to the pension plan.

      Reply

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