Moore: RI Should Transfer the Lottery to the Pension Fund

Monday, May 22, 2017

Russell J. Moore GoLocal MINDSETTER™

New Jersey Governor Chris Christie proposed an innovative and intriguing idea last week to help bolster his state’s foundering pension fund.

The plan would transfer ownership and control of the state’s lottery to its pension fund. The transfer, assuming the plan is affirmed by the state’s legislature, would reduce the state’s unfunded liability by roughly $13.5 billion, according to Pensions & Investments. The plan would also see an increase in contributions of $37 billion to the pension plan from the lottery revenue.

The immediate reaction of some folks, upon hearing this plan, would be surprise that the state would be willing to turn over a lucrative source of revenue away from the state budget, and into the pension plan.

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But money is fungible. And pension plans can most easily be compared to a three-legged stool.

The market returns from the fund’s investment make up one leg of thee stool. This is rather unpredictable, particularly on a year to year basis.

A Rational, Innovative Plan

The second leg of the stool are employee contributions. That’s a predictable source of revenue, but it doesn’t cover the cost of maintaining the fund.

Taxpayer contributions comprise the last leg of the stool. This is the largest variable in the equation. When the market returns are weak, the taxpayers are counted on to keep the fund solvent and running smoothly to make sure the retirees are seeing their pensions funded.

So it stands to reason, that when the going gets tough, the state’s revenue gets sent over to the pension fund. In the grand scheme of things, it doesn’t matter if those dollars are coming from the state lottery, or tax collections, or federal aid, etc.

Therefore, if the state decided to place the lottery under the control of the state pension fund, it would not make much of a difference to the state budget.

Given these facts, the state of Rhode Island ought to consider placing ownership of the state’s lottery under the control of its pension plan.

Taking into Account

The big benefit to the pension fund, however has to do with the accounting of the asset. The state lottery could technically be privatized and sold to some white shoe, Wall Street firm. That firm would then turn around and hire a management company to administer the lottery, and the proceeds would go to the company.

What all of this means is to say that the state lottery has value. That value would then be counted as part of the pension fund’s assets--which would, in turn, lower the unfunded liability of the fund.

At the end of last year, the state pension fund’s plan for teachers was funded at roughly 58 percent and its plan for state workers was funded at about 56 percent. (That number may have slightly increased this year thanks to the stock market rally.) That means if everyone who has earned benefits demanded them now, the plan would be able to meet 58 and 56 percent of its obligations.

Adding a massive asset (and it would take a valuation and study to assess its actual market value) to the pension plan’s portfolio would significantly reduce the fund’s liabilities. And there doesn’t appear that to be any actual drawback to the state’s finances, since although the state would lose that asset (on paper), it would mean the state wouldn’t have to put as much money into the system on a yearly basis to keep it afloat.

The state could also transfer ownership of the Narragansett Bay Commission to the control of the state pension fund as well, and reap similar benefits.

Innovative Thinking

Providence could also take advantage of this innovative, outside-the-box style thinking.

There’s been some talk about potentially selling Providence Water in an attempt to help shore up the capital city’s finances. Instead, the state should consider transferring control and ownership of the system to the pension fund, which would bolster that fund’s financial health and stability.

Given the massive upside and very few, if any, drawbacks to this plan, envisioned by Christie, the state of Rhode Island should start taking a long, hard look at the charting a similar course of action.

Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected]. Follow him on twitter @russmoore713.

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Related Slideshow: 11 RI Retirees Who Had Pensions Suspended

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