Connecticut should consider earmarking lottery receipts toward its pension liabilities in a move similar to that of New Jersey, according to a financial consultant.
“One of the values of an asset contribution is that you take some of the funding discretion out of the legislature’s hand,” Jim Millstein, founder and chief executive of Millstein & Co., told members of the Connecticut Pension Sustainability Commission in Hartford.
New Jersey, in a $13.5 billion transaction in July 2017, transferred its lottery enterprise, including its net proceeds, to three of its retirement systems for a 30-year term. Millstein’s firm worked on that deal. In July, Guggenheim Partners
Benefits from the lottery contribution, said Millstein, included improvement in New Jersey’s aggregate statutory funded ratio to 59% from 45%, while alleviating concerns in the capital markets by ensuring 30 years of substantial contributions to eligible state retirement systems, and lowering borrowing costs through improved credit ratings.
“When you look at the salutary effect on New Jersey’s credit profile, this is exactly what the credit rating agencies called out as one of the significant benefits of the granting of a 30-year concession over the lottery revenues to the New Jersey State Teachers Plan,” Millstein said. “It relieves some budget pressure and thereby give the rating agencies confidence that the state is getting its act together.”
Fitch rates Connecticut’s general obligation bonds A-plus. Moody’s Investors Service assigns an A1 rating, while S&P Global Ratings and Kroll Bond Rating Agency assign A and AA-minus, respectively.
According to a
The report by legislative analyst Thurston Powers of ALEC's Center for State Fiscal Reform cited $1.1 trillion in bonded obligations across the 50 states. It pegged Connecticut's total bond liability at just under $37 billion and its GO debt at $23 billion.
Connecticut has an estimated $33.8 billion pension liability, while its five largest cities — New Haven, Bridgeport, Hartford, Waterbury and Stamford — owe $2.1 billion. The state’s budget struggles and those of its major cities contrast with Connecticut’s high wealth metrics. Connecticut’s per-capita income is 140% of the national average.
Beneficiaries under the New Jersey deal included the Teachers’ Pension and Annuity Fund, eligible members of the Public Employees’ Retirement System and eligible members of the Police and Firemen’s Retirement System.
“We’re all intrigued about the New Jersey example,” said Rep. Jonathan Steinberg, D-Westport, who chairs the commission.
The New Jersey transaction, however, does not improve funding levels, said Alan Schankel, a managing director at Janney Capital Markets.
“Although I have no negative feelings about the New Jersey lottery transfer, I don’t see it as a hugely positive credit event because it really doesn’t improve the funding, necessarily,” Schankel said. “What it did, essentially, was say the state will not fund at zero or an incredibly low level in any given year.
“It wasn’t new money,” Schankel added. “It’s taking from A to give to B.”
Connecticut’s panel, now at 11 members, is exploring ways to curb its own pension liability, which combined with other legacy costs and budget imbalance, was a factor in downgrades from all four bond rating agencies last year.
While his firm was consulting with Puerto Rico, Millstein, a Connecticut homeowner, conducted a survey of pension liabilities in all 50 states.
“I was astonished to find out that Illinois and Connecticut were not far behind in the amount of the budget that is dedicated to the servicing of legacy liabilities,” he said. “This is a broader crisis than a small island in the Caribbean and Connecticut is not alone.”
Legislatures of states with the highest liabilities, such as Illinois, Connecticut, and California, are monitoring Puerto Rico’s default process, said Powers. "Although Puerto Rico is a territory rather than a state, the restructuring of its liabilities may serve as a blueprint or a warning to states considering it."
The Connecticut Teachers Retirement System projects 55% funding with a $14 billion gap for fiscal 2019. The state’s lottery system produced $330 million of net revenues for the general fund in 2017.
“You’re creating a hole in the existing budget for sure, which you’re going to have to fill some way else, but at a minimum you could offset the annually required contribution that you would otherwise make,” said Millstein. “This is not a magic bullet, but it’s a start.”
