N.J. tax­pay­ers beached again

The Washington Post Sunday - - DIVERSIONS - al­lan.sloan@wash­post.com

Most peo­ple’s im­age of New Jer­sey Gov. Chris Christie these days is the StarLedger photo of him sun­ning him­self on an empty pub­lic beach that he’d closed be­cause of a bud­get dis­pute with the state legislature.

That ar­ro­gance is a hard act to match. But Christie’s get­ting there, by claim­ing to have greatly im­proved New Jer­sey’s fi­nan­cial con­di­tion by giv­ing the pro­ceeds from the Jer­sey Lottery to the state’s hard-pressed pen­sion funds for 30 years.

Christie said the lottery deal,

part of the state bud­get passed on July 4, will “pro­vide an im­me­di­ate re­duc­tion in the state’s long-term re­tiree obli­ga­tions by $13.5 bil­lion” and has in­creased the pen­sion plans’ fund­ing ra­tio to 59 per­cent from 45 per­cent.

But al­though this deal helps the pen­sions a bit by forc­ing the state to con­trib­ute the Lottery’s prof­its (cur­rently around $1 bil­lion) to the funds rather than to­tally stiff­ing them as it did in some years, Christie’s $13.5 bil­lion claim is silly at best, mis­lead­ing at worst.

Think of it as mov­ing a dol­lar to your right pocket from your left pocket, then pro­claim­ing that your right pocket has $13.50 in it.

“This is a ques­tion­able ma­neu­ver de­signed to pro­duce a bet­ter-look­ing fund­ing ra­tio,” said Lisa Wash­burn, man­ag­ing di­rec­tor of Mu­nic­i­pal Mar­ket An­a­lyt­ics. “I see it as more of an op­ti­cal ben­e­fit for the state than a ma­te­rial im­prove­ment in the state’s fis­cal dilemma.”

Stick­ing the Lottery into the pen­sion funds for 30 years — please note that it’s not a per­ma­nent trans­fer, as has been gen­er­ally re­ported — doesn’t come close to solv­ing their prob­lems. As I’ll show you in a bit.

Why haven’t Christie’s fi­nan­cial ex­ag­ger­a­tions got­ten any­thing re­sem­bling the re­ac­tion his sun­bathing pic­tures got?

Be­cause pars­ing the Lottery deal and ex­plain­ing it clearly and sim­ply is no day at the beach. (You can groan now.)

This isn’t a parochial is­sue af­fect­ing just my fel­low Jer­sey res­i­dents and me. If Christie’s Lottery lol­la­palooza some­how gets blessed by the ma­jor credit rat­ing agen­cies and the Gov­ern­ment Ac­count­ing Stan­dards Board (all of which de­clined to com­ment), other states with un­der­funded pen­sions and lu­cra­tive lot­ter­ies will doubt­less try sim­i­lar ma­neu­vers. That would make mis­lead­ing state book­keep­ing a na­tional is­sue rather than a lo­cal is­sue.

Now, let me take you through all of this, as clearly and sim­ply as I can.

The Aca­cia Fi­nan­cial Group, an an­a­lyt­i­cal firm hired by the state, pro­jected that the Lottery will earn about $37 bil­lion in prof­its dur­ing the 30 years the pen­sion funds will own it.

Be­cause it’s not clear how much the Lottery will make over 30 years — and be­cause a good chunk of what­ever shows up won’t ar­rive for decades — Aca­cia says to­day’s value of the Lottery’s pro­jected prof­its is a mar­velously pre­cise $13,535,079,104.

How­ever, even if credit rat­ing agen­cies and ac­count­ing reg­u­la­tors agree to treat the Lottery a multibil­lion-dol­lar as­set, which I con­sider un­likely, the Lottery’s value on the pen­sion funds’ books will grad­u­ally drop to zero by mid2047, when the Lottery re­verts to the state. As years go by, the Lottery’s value to the pen­sion fund de­clines be­cause there are fewer years of prof­its left to col­lect.

In ad­di­tion — this is my fa­vorite part — for the first five years of this deal, the state will re­duce pay­ments to the pen­sion funds from its gen­eral fund by al­most ex­actly the amount that the Lottery pro­duces. This means that for the re­main­ing six months of Christie’s term and the first term of his suc­ces­sor, own­ing the Lottery won’t help the pen­sion funds at all.

A May pre­sen­ta­tion by the state trea­surer’s of­fice shows the pen­sion plans’ funded ra­tio — their as­sets di­vided by the amount they need to cover pay­ments to current and fu­ture pen­sion­ers — falls from about 60 per­cent when Christie leaves of­fice at year-end into the 50s.

The ra­tio then be­gins to head up. But that rise as­sumes that fu­ture gov­er­nors and leg­is­la­tures will put lots more money into the funds than is cur­rently go­ing in. Lottery pro­ceeds, cur­rently just over $1 bil­lion an­nu­ally and pro­jected to grow about 1 per­cent a year, com­pounded, are only a small por­tion of what’s needed to make the funds fi­nan­cially sound.

The Christie ad­min­is­tra­tion, as you might ex­pect, takes is­sue with my con­clu­sions, which I shared with both the Trea­sury and Christie’s chief spokesman.

“In­de­pen­dent, out­side an­a­lysts as­sessed the Lottery’s fair mar­ket value and what it will add to the pen­sion port­fo­lio,” the Trea­sury said in a state­ment. “Its value is based on its proven busi­ness model, decades of rev­enue his­tory, pro­jec­tions of fu­ture re­turns to­tal­ing $37 bil­lion in ded­i­cated pen­sion fund­ing over 30 years, and the rel­e­vant ac­tu­ar­ial stan­dards. Adding this value to the port­fo­lio re­duces the state’s pen­sion obli­ga­tion by $13.5 bil­lion.”

If you think, as I said be­fore, that mov­ing a dol­lar from your left pocket to your right pocket and valu­ing it at $13.50 passes muster, you’ll agree with the Trea­sury.

If not, you’ll agree with me. And that’s the bot­tom line.

Dis­clo­sure: I voted for Christie twice.


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