Letting the Unions Win the Lottery
I have to admit that NEA head Bob Walsh’s proposal to give the public sector pension system “equity” from the state lottery instead of this year’s cash contribution confused me. Most prominently, I don’t see how a government that habitually spends hundreds of millions of dollars over its revenue can be presumed to need a one-year fix, even if the economy were to right itself within the three to four years that Walsh predicts. Second most prominently, Bob doesn’t explain why the pensioners would want an asset yielding cash returns this year at a fraction of the cash that they were expecting.
Anchor Rising readers have the advantage that one of Walsh’s numbers should look familiar: The 8.25% that he puts forward as his “conservative expected return” is precisely the figure that inspired so much discussion ’round here. The key to his whole scheme, in other words, is to determine the percentage of the lottery that would be given to the pension system in lieu of this year’s $243 million payment by calculating backwards from the “expected” return that the pension system requires in order to be solvent.
If the state were to put $243 million into the account, that money would have to generate a $20 million return (in a slow economy) for the pension scheme to work, so Walsh is requesting $20 million from next year’s lottery revenue and calling that 8.25% of the pensions “equity.” One could pick just about any number, suggesting, for example, that the projected $365 million in total lottery revenue really represents only a 3% of a total value (we’re assuming) of $12 billion, making the pension’s $243 million just 2% equity, with a projected return of $4 million, instead of $20 million.
But we could run this formula all evening. The salient question is, accepting Walsh’s proposal, what happens next year. The state could resume cash payments, or it could give the pension system another chunk of lottery equity. Me, I’d wager that Walsh would, at that time, recalculate the value of the lottery such that his union members still receive their 8.25% return (plus, of course, the percentage already covered by this year’s revenue). The one certainty is that the revenue coming into the state would diminish each year this method is used.
Another certainty is that those who control the pension system would be able to divest themselves of this lottery equity, should things turn around such that other investments would yield better returns. Again, I’d wager that the unions would turn to the state to buy back the equity at more than its value.
It’s a clever ploy, buried beneath the confusion of Walsh’s “sound financial principles,” and treating it all as if it were found money. The money is not “hidden” in the system, though. It’s our money, and it’s under the control of our representatives, both of which make it as a shiny thing to Walsh’s searching eye.