New Jersey's recent law directing lottery receipts to pension funds could be a model for Connecticut, the head of Connecticut's lottery told a panel in Hartford.
"Having reviewed documents from New Jersey's legislation regarding using their lottery to bolster their pensions, we were encouraged to see that their valuation used lottery input for projecting sales and profits by game," Connecticut Lottery Corp. President Gregory Smith said during Wednesday's bimonthly meeting of the Connecticut Pension Sustainability Commission at the legislative office building.
New Jersey implemented its Lottery Enterprise Contribution Act in 2017. The lottery legislation is estimated to put $37 billion into New Jersey's underfunded pension system over 30 years. That state's pension burden weighed heavily in 11 bond-rating downgrades since 2010.
"Should this commission ultimately recommend using lottery to shore up pension funding we hope that you will also consult with your lottery to know what the future looks like for current games," said Smith, who said the addition of internet or sports betting could enhance the lottery system's value.
"Of course, even together, internet lottery and sports betting won’t balance the state’s budget or shore up the state’s pension obligations, but these concepts are viable for improving profits for the state, and would help ensure the lottery’s relevance, and continued growth, in the years to come," he added.
Smith, three months into his Connecticut tenure, studied the legislation while in charge of the Illinois system.
"I thought their approach was novel in the idea of dedicating the proceeds and I think maybe one of the keys from my understanding was the value of the corporation being added to the pension valuation so that it could either alleviate or relieve some of the general fund [and] support pensions," he said. "It was a very interesting approach."
The legislature should decide what to do with lottery proceeds, Smith said. "We think of ourselves as the machine."
Connecticut's bipartisan pension panel is exploring alternative means of reducing its own pension liability. While its findings are due Jan.1, its work may spill over.
The state has an estimated $35 billion pension hole while its five largest cities — New Haven, Bridgeport, Hartford, Waterbury and Stamford — owe $2.1 billion. An April report by Pew Charitable Trusts listed Connecticut among five state retirement systems less than 50% funded.
Connecticut's major pension systems are the State Employees' Retirement System and the Teachers' Retirement System.
"There's an interest level beyond this room, beyond Hartford and the legislature," said state Rep. Jonathan Steinberg, D-Westport, the commission chairman. "This could be a model for other states and other government entities."
According to Pew, the funding gap between state pension system assets and benefits promised to workers reached $1.4 trillion in 2016.
Connecticut last year received bond rating downgrades from all four rating agencies, which pointed to chronic budget imbalance and high legacy costs.
Moody’s Investors Service rates Connecticut's general obligation bonds A1, while S&P Global Ratings and Kroll Bond Rating Agency assign A and AA-minus ratings, respectively. Fitch Ratings rates them A-plus.
The state created its lottery system in 1972 and made it a quasi-public corporation in 1996. Lottery officials reported sales of $1.26 billion in fiscal 2018 and returned $345 million that year to the general fund, according to Smith. The lottery also paid $70 million in commissions that year to retailers.
Smith, who also oversaw Vermont's lottery system, called the quasi-public model "a good mix of entrepreneurial spirit tempered by accountability to the legislative and executive branches, both directly and through our board." He cited an Ohio study that called quasi-public operational structures ideal for lotteries.
According to Steinberg, revenue consistency is important.
"How consistent are those revenue streams?" he asked Smith. "You're introducing new products at any given time and some are getting tired. Reliability of revenue is something that would be important to us."
Smith said Connecticut ranks fifth in sales per capita among the 47 states that have lotteries.
"We have over the past 10 years shown a very consistent growth model."
