Lottery Mentality for New Jersey Actuaries

Twenty of the thirty-two pages in a presentation to investors for a $350 million bond sale last month by the New Jersey Economic Development Authority was devoted to the Lottery Enterprise Contribution Act starting off with these points:

This is a scam where items 2, 4, and 5 are only true if the Retirement System’s actuaries go along with the fraud. On the next page of the presentation:

While IRS and GASB look on silently?

7 responses to this post.

  1. Posted by dentss dunnigan on November 16, 2017 at 12:48 pm

    Well that didn’t take long ,NJEA will be furious now ! …New Jersey Democrats may reconsider ‘millionaire’s tax,’ Sweeney says


  2. Posted by Tough Love on November 16, 2017 at 1:52 pm

    Of course treating the PV of the expected Lottery proceeds as an asset is a fraud.

    Anyone with any financial acumen ………….. and not in “refusal-to-admit” mode because they are benefiting from the current system as a pension Plan participant or as a union-ass-kissing Elected Official seeking Union campaign contributions ………. understands that it a fraud.

    What concerns me, is that the insatiably-greedy and taxpayer-be-damned Local Police Unions will assuredly argue that it SHOULD be included when testing their Plans funding ratio to see if the criteria to reinstate COLAs has been met.

    Hopefully, any attempt to do so will result in Taxpayer-backed litigation to disallow the inclusion of the PV of the expected Lottery proceeds as an asset in the COLA-reinstatement determination.


    • Posted by Tough Love on November 16, 2017 at 1:58 pm

      FU Question………..

      Are any of the Lottery Proceed going into the LOCAL Police Plans ? If not, my above concern disappears.

      If I recall correctly, MOST of the Lottery proceeds are going into the Teachers pension Plan, and with their VERY VERY low current funding level, reinstating COLA isn’t in the cards for a VERY long time (if ever).

      What other (State or Local) Plans are getting the Lottery proceeds? Do any of them have funding ratios now sufficiently high that the addition of the Lottery proceeds may soon result in a reinstatement of their COLAs?


  3. Posted by boscoe on November 16, 2017 at 3:24 pm

    This scheme is actuarially bogus and budgetarily bogus as well. The lottery proceeds aren’t dedicated through a constitutional amendment or even a public ballot question. A 30-year “dedicated” stream of future lottery revenues that is accomplished through a simple statute (law) that can be undone at any time in the future by another law, should not relied upon in determining the funded status of the pension systems. The systems do not have an asset in hand. They have a “promise” to contribute future lottery revenues over 30 years, after which they revert to the state budget . Why should any honest actuary or accounting standards board take this promise at face value?

    For what it’s worth, this is not the same as Whitman’s sale of POBs in 1997. Those bonds ($2.7 billion worth) were sold and the proceeds were actually deposited in the pension funds. True, everything that happened after that was a hot mess, but at the time the funded status of the pension funds increased because the assets were in hand.

    When Moody’s was evaluating this lottery scheme for purposes of rating New Jersey’s credit worthiness, the State Treasurer’s office submitted a chart showing a ramp-up of budget contributions to the retirement systems from 2018 to 2023, after which contributions would level off for the remainder of the 30-year lottery transfer. The bars on the chart indicate required pension appropriations from the state budget need to go up by close to $750 million per year, notwithstanding the LOSS of $1billion in lottery revenues removed from the General Fund in each of those years. In other words, some combination of new tax revenues and/or other budget cuts totaling around $1.75 billion each year are needed just to tread water, without considering any other increases in budget needs (e.g., school aid, debt service) over that period. Does anyone think this is going to happen?

    And not to put too fine a point on it, Moody’s has accepted (for now) the completely bogus actuarial pension liability projections put forth by the Administration that clearly understate the magnitude of the problem. Sooner or later smoke and mirrors will run into reality.


    • Posted by Tough Love on November 16, 2017 at 4:35 pm

      Quoting …..

      “In other words, some combination of new tax revenues and/or other budget cuts totaling around $1.75 billion each year are needed just to tread water, without considering any other increases in budget needs (e.g., school aid, debt service) over that period.”

      Actually it’s a GREAT deal higher, because your $1.75 Billion is based on NJ’s “official” ultra-liberal valuation using the 7.65% (Official Plan) interest rate in discounting Plan liabilities. If valued using the assumptions & methodology REQUIRED of Private Sector Plans (i.e., an honest/realistic calculation), that $1.75 Billion would be closer to $5 Billion.

      And your LAST paragraph it’s the nail on the head.


  4. Posted by Mike on November 17, 2017 at 8:27 am

    I can only think of 4 groups that might care that NJ has moved its Lottery money from one pocket to another: the auditor, bond investors, retirees, and the IRS. Some comments on each follow.

    Bottom line…this move was done to help the COLA calculation in future years, and risks making the Lottery revenue taxable. Otherwise its cosmetic aspects are ignored.

    (Auditor) Nowhere in this presentation or anything else online do I see reference to the present value of Lottery proceeds actually showing up as an Asset in formal pension plan accounting, and I have to wonder how it could. I expect reported Assets to exclude this item. Note also (page 12 of investor presentation) that the official and audited ARC does not reference this thing as an asset. The State’s contribution is the official ARC less an adjustment that does reference this asset.

    Even though the auditors might not care, the $13.535 bn valuation of the proceeds performed by Acacia seems to have been carefully done. And they used a discount rate of 7.66%, more or less consistent with the pension plan discount rate of 7.65% used for 2016 TPAF valuation. This is required or anyway suggested in ASOP 44.

    (Investors) It seems pretty intuitive that in normal times, earmarking a modest amount of State revenue for a particular purpose will have no effect on its ability to make bond payments, so bond holders should be more or less indifferent to this scheme. Moody’s yawns in agreement.

    (Retirees) While the current funded ratios of the three plans (see page 11) that get some of this Lottery money are still poor, they are better. It appears to me that NJ intends that this money “counts” in any future COLA calculation. The actuaries must count it if the State tells them to do so. Auditors don’t opine on this statutory calculation. Bondholders should care and probably do, although Moody’s does not specifically comment on the prospect of faster revival of COLA increases..

    (IRS) I have to wonder whether IRS might consider Lottery income of a pension plan to be taxable. The broader issue is discussed on a prior recent thread on this board. I wonder if a pension plan entering this new business for the first time can trigger IRS review, even under current law and certainly under that proposed law.


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