Recent news reports have indicated that New Jersey’s funding of their upcoming pension contribution ($3.75 billion) is going to be negatively impacted by a decline in lottery revenues. Although that is a true statement, NJ’s issues go well beyond the impact of an 11.6% decline in lottery revenue, which if the full amount had been generated was only going to cover 26.7% of the contribution in the first place. No, NJ has many issues, the least of which is a minor (given the Covid-19 environment) shortfall in lottery revenues.

First, I’m not sure that NJ has made a full payment of the annual required contribution since George Washington slept here. Second, Governor Murphy and the state legislature are today in front of the NJ supreme court trying to convince this august body that approving a $9.9 billion loan from the Federal government without a referendum was perfectly legal. Please understand that they are seeking to borrow $9.9 billion on a current budget of just over $38.7 billion (2019-2020) or roughly 25.6% of the current outlay. Also, understand that they extended fiscal year 2020 an additional 3-months through September 30th by passing an appropriations bill for $7.6 billion. A formal budget for 2021 is not likely before 9/30.

With forecast revenues for state income and sales expected to plummet, while expenditures rise as a result of Covid-19 activities, NJ is in no position to once again pay their full ARC. Given NJ’s funded status any shortfall in making the ARC is devastating. NJ’s pension system is on a slippery slope to becoming a pay-as-you-go system, with some estimates pegging 2028 as the year in which this occurs. The annual cash flow out of the system (benefit payments) will dwarf current ARC requirements placing additional and perhaps unmanageable burdens on the State’s budget.

There is NO WAY that NJ can invest their way to success given the funded status is roughly 23% when valuing liabilities on a mark-to-market basis as opposed to the ROA under GASB. The only way that NJ’s pension system survives is to arrange a loan from the Federal government large enough to cover the Retired Lives liability that will secure the promised benefits, while buying time for the current assets and future contributions to exceed future liability growth.

Nearly 800,000 (or 9% of the roughly 8.88 million residents) NJ public workers participate in the pension system either as retirees or active participants. Failure to protect and preserve the promised benefits will be catastrophic for NJ’s economy, as we know from studies that a significant percentage of benefits received are spent locally. Easy for me to suggest that the Federal government should be willing to provide low-interest loans to states such as NJ, IL, KY, and CT, but failure to secure these promised benefits will create a social and economic nightmare for the economy and country. One caveat, if any of these states are successful in arranging for such a loan, the proceeds MUST be used to defease the plan’s current liability and not invested in a more traditional asset allocation.

If this strategy sounds familiar: it is! This implementation is mandated in the Butch Lewis Act to help preserve Critical and Declining multiemployer plans.