Dan Haar: State could save billions by giving lottery to pension funds
As political leaders scratch their heads to find ways to balance the state budget, there’s a move afoot for the state to sell the Connecticut Lottery Corp. — or more precisely, hand it over — to the treasurer’s office.
The plan, not yet fully formed, comes with kinks that need to be worked out. But it could save billions of dollars and improve the state’s overall financial picture.
One other state, New Jersey, made the move last year.
There’s a strong chance the giveaway, or some version of it, will emerge as a recommendation of the Commission on Fiscal Sustainability and Economic Growth, which has a March 1 deadline for a plan to help right the state’s finances.
Even before then, the lottery giveaway has powerful supporters who at least want to see whether the numbers add up.
“The idea is to reduce the amount of your annual pension contribution based on the funds that the lottery is bringing,” said Sen. Tim Larson, D-East Hartford, co-chairman of the public safety committee, which oversees the state lottery.
“You don’t sell the lottery, you just park it under the treasury,” Larson said. “You’ve added value to that pension fund, so it’s in better shape.”
One problem: Lottery customers feel comfortable that the proceeds go toward education, programs for elderly residents, town aid or whatever worthy expenses they choose to imagine. If the lottery moves to the treasurer’s office, it goes toward paying for the pensions of retired teachers or state employees.
“I’m concerned about the marketing challenges that the Connecticut Lottery Corp. could face if the proceeds are directly tied to state employee pension plans,” said Chelsea Turner, interim president and CEO of the lottery.
That’s because the pensions are a matter of controversy, not something a product marketer relishes.
How it works
The lottery corporation is quasi-public; it’s part of the state but operates under a separate board of directors. Customers buy about $1.2 billion a year worth of tickets and other entries, and the lottery kicks more than $300 million a year to the state’s general fund.
Despite some hand-wringing over operational problems, including a mess-up in a New Year’s Day game that cost the lottery $1.5 million in a re-do, the corporation has seen rising profits in recent years, to a record $337 million in fiscal 2016. Last year’s take for the state was $330.5 million.
Under the transfer plan, the state would set a value on the lottery for the next 20 or 30 years. For example, based on profits in the range of $330 million a year, the asset over the next 30 years could be worth about $4.7 billion, maybe more if we assume added revenues from new games.
If the state were to hand the lottery over to the treasurer’s office — or more specifically, the proceeds of the lottery for the next 30 years — the treasury could assign that asset to one of the underfunded pension funds.
The state employees’ retirement fund, for example, is underfunded by $21.4 billion and the teachers’ retirement fund is underfunded by about $10 billion. If the lottery asset were placed into one of those funds, it would instantly lower the deficit by an amount equal to value of the lottery asset.
The result: The state’s general fund would be able to reduce its annual payments to the treasury to cover the pension funds by the amount the lottery earned each year. That would be a wash on the balance sheet.
But here’s the kicker: Because the fund would carry a smaller unfunded liability, the overall annual payments into it could be less. It’s like a shrinking the mortgage on your house.
How much less? Maybe as much as $200 million. In any case, it’s a big number that hasn’t been calculated yet.
Rep. Joe Verrengia, D-West Hartford, another public safety co-chairman, said the idea is worth vetting, but he’s also concerned about the marketing issue.
Larson cited another possible benefit: The transaction could give the state a chance to rethink the way the lottery is managed and directed. “Does the Connecticut Lottery Corp., which I have some concerns about currently, still run it?”
Don DeFronzo, who became chairman last summer in the wake of problems that forced the exit of the previous CEO and chairman, said the quasi-public model has been extremely effective, one of the only rising revenue sources in the state in recent years.
He and Turner both said they welcome ideas on improving operations.
Management issues aside, the would-be transfer to the treasury is the action to watch. The idea was presented to the fiscal stability commission by Jim Millstein, a financial consultant and investment banker in New York and Washington, D.C., whose firm worked on the New Jersey transaction.
For years, states and municipalities have raised money by selling assets or by privatizing services. For example, te city of Hartford sold a parking garage to the Capital Region Development Authority for $14 million in 2015.
But asset sales mean loss of control over the asset and privatization tends to raise the ire of public employee unions — for example, when trash collection is contracted to outside companies.
An asset transfer to the pension funds can be less risky, keeping the assets in public hands and unlocking value. The state’s general fund can’t benefit from the overall value of the lottery other than through income, while the pension funds can use the income plus reduce their long-term liability.
Jan Hochadel, president of AFT, the large union of teachers and service workers, many in state jobs, said the union has long urged measures to stabilize the pension funds. “We’re eager to see the details of any proposal that would promote greater stability and viability for this valuable public asset,” she said in a written statement.
So why haven’t we seen more of these types of deals?
“Five years from now we’ll all look back and this will be the first set of hundreds of transactions across the country,” said Millstein, of Millstein & Co.
Millstein was the high-ranking official at the U.S. Department of the Treasury credited with some of the financial bailouts in the aftermath of the Great Recession, notably the $182 billion AIG deal that ended up netting the treasury a profit.
The office of Treasurer Denise L. Nappier didn’t offer a comment on the idea.
It’s too early to tell whether New Jersey, which added its lottery corporation to its teachers retirement fund in the middle of last year, is seeing a negative backlash from customers.
Moody’s Investors Service issued a report on the New Jersey transfer, saying bigger benefits would come from reforms to the pension fund itself. One such reform that’s also in the offing in Connecticut: A refinancing of the teachers pension fund.
But that’s standard stuff. This innovative transfer idea could unlock such huge savings — at a modest cost of maybe $10 million to $15 million in Wall Street fees — that we should be willing to live with issues like marketing worries.
It’s worth trying. And as with the successful Access Health CT Obamacare exchange, Connecticut could be in the forefront of progress on this one.