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S&P Global Ratings raises New Jersey credit outlook on lottery deal for pension fund

New Jersey's credit outlook was raised Friday by S&P Global Ratings to stable from negative, due in part to legislation that assigned state lottery proceeds to the $73.8 billion New Jersey Pension Fund, Trenton, and other legislation that mandates quarterly state payments to the pension system.

"The outlook revision reflects our belief that the state's combined pension funded ratio, calculated on a Governmental Accounting Standards Board 67 basis, will stabilize or improve over our one-year outlook horizon, following a decline in the most recent July 1, 2016, actuarial valuation," David Hitchcock, an S&P Global Ratings credit analyst, said in a report.

However, the state's overall general obligation bond rating remains A- as pension funding and other issues have kept New Jersey as the state with the second-worst credit rating behind Illinois, the report said.

"New Jersey's high unfunded pension liabilities and underfunding of the state's annual actuarially determined contribution remain key credit considerations and a source of future budget pressure," according to the report.

Legislation signed by Gov. Chris Christie in early July turning the state lottery system into an asset of the New Jersey Pension Fund has "slight positive credit implications, mostly because lottery money paid monthly is not available for holdback by the governor at the end of the fiscal year in the event of a budget shortfall," the report noted.

The lottery legislation will provide about $1 billion to the pension fund during the fiscal year that started July 1. The state has promised to contribute another $1.5 billion from general funds. Legislation that took effect July 1 guarantees that general fund payments will be made quarterly rather than the former practice of a lump-sum payment made near the end of each fiscal year.

State Treasurer Ford Scudder issued a report in May saying the lottery would add $37 billion to the pension system during the next 30 years and would immediately raise the overall funding ratio to 58.7% from 44.7%.

However, S&P Global uses the stricter GASB 67 standards to assess pension fund health.

"We do not expect GASB valuations to recognize the state's recent legislative transfer of its lottery enterprise revenue to the retirement funds for 30 years as an investment 'asset,' under which the state recognizes a much higher funded ratio using its own actuarial assumptions," the S&P report said.

S&P pegged the funding ratio at 30.9% for the year ended June 30, 2016, down from 37.5% the year before.

Even with a $2.5 billion lottery and general funds contribution to the pension fund for the current fiscal year, that amount is still only half of actuarially determined contribution, S&P said.