There's a new cause for concern about New Jersey's chronically underfunded public-worker pension funds — sagging state Lottery revenues.

That's something of a double whammy for one of the nation's worst-funded state retirement systems, which has seen investment returns plummet precipitously during the coronavirus pandemic.

So far this fiscal year, Lottery revenues, which serve as a dedicated source of funding for the pension system, are down more than 12% compared with the same period last year, according to the latest data released by the Department of Treasury.

During the month of March, the year-over-year revenue drop-off was even more dramatic, reaching nearly 30%.

While there's still time to make up ground, any rally would have to occur as economic activity across the state has been sputtering amid the strict social-distancing measures enacted by Gov. Phil Murphy in response to the pandemic.

Lottery losses put squeeze on state budget

Adding to the dilemma is the way that Lottery funds have been used in recent years as part of a broader plan to shore up state pension contributions that have for years been shorted in the annual budget. That plan worked well when the economy was booming, but in a downturn, Lottery revenue shortfalls put more pressure back on the state budget even as it, too, is being strained by the ongoing pandemic.

There is one potential benefit if the sag persists: The company that has been handling sales and marketing duties for the Lottery under a long-term privatization deal may not be able to earn year-end performance bonuses this year.

New Jersey began dedicating revenues from the state Lottery to the pension system in 2017 under a reform that was enacted by then-Gov. Chris Christie.

A two-term Republican, Christie frequently highlighted the state's pension-funding problems, but he also never made a full employer contribution as calculated by the state's actuaries. In fact, during his first full year in office, Christie made no state pension contribution at all as New Jersey was still in the throes of the Great Recession.

To help make up some of the ground, Christie's 2017 reform carved out monthly revenues from the Lottery as an automatic and dedicated source of state funding for the pension system. The setup assumes at least $1 billion in annual revenue can go directly into the pension funds from the Lottery, thus easing how much has to come out of the annual budget.

But the new system of funding was set up during the long expansion from the Great Recession, and as the Lottery system was adding new games that helped drive growth. It is now facing a stiff test amid the economic slowdown that's been caused by the coronavirus, which has hit New Jersey particularly hard.

Lottery revenues go through the floor

Through the first nine months of fiscal year 2020, Lottery revenues have totaled $707.8 million, according to Treasury's latest revenue data. That's off the pace of the prior fiscal year by nearly $100 million. And for the month of March 2020, Lottery revenues totaled just $78.2 million, or 27% less than was collected in March 2019.

Treasury officials have acknowledged that many of the retailers the state relies on to sell Lottery tickets are experiencing reduced foot traffic amid the pandemic, and it's too soon to say when economic activity could get back to normal.

"For the first two weeks of March, average daily sales were over $10 million per day, but for the last two weeks of March, average daily sales were closer to $7 million per day," said Treasury spokeswoman Jennifer Sciortino.

"Based on reduced foot traffic to retailers and tighter activity restrictions, a greater drop in sales is possible," she went on to say.

While Murphy has consistently been ramping up state pension contributions since he took office in early 2018, those payments have yet to reach the full amount calculated by actuaries, and an unfunded pension liability that measures well over $100 billion has persisted.

Since Treasury assumes roughly $1 billion in annual revenues will come from the Lottery to help prop up the pension funds, any shortfall in fiscal year 2020 would either mean more funding will have to come out of the state budget or the huge unfunded liability will grow even bigger on paper.

"If the lottery contribution is less than anticipated, it may increase the unfunded actuarial accrued liability (UAAL) in subsequent years, unless the state makes up the difference," Sciortino said.

June pension-payment deadline

Even though Murphy recently enacted legislation that extended the current fiscal year by three months, the state's next quarterly pension contribution is due to be made at the end of June. The size of the last quarterly payment — which the state was able to make at the end of March — was $684 million, Treasury officials said.

A plan to contribute almost $300 million more to the pension system by the end of June has already been scrapped amid the pandemic, and Treasury has also frozen nearly $1 billion in additional fiscal 2020 spending.

As the preparations were being made to extend the state fiscal year, credit analysts had already suggested they would be watching what happens in New Jersey  — including upcoming pension contributions — very closely. The size of the state's long-term liabilities was also mentioned in a downgrade of its rating outlook that was issued last week by Moody's Investors Service.

But even as the length of the state fiscal year has changed, Treasury officials are taking the position that their contract with the private company that handles Lottery marketing and sales duties, Northstar New Jersey, only provides performance bonuses for revenue that is generated during a 12-month "contract year." That eases some concern that the extension of the fiscal year could have given the company a longer term to meet its bonuses, which have cost the state $30 million or more in some recent years.

"The contract year is explicitly defined in the agreement as July 1 through June 30," Sciortino said.

Under the latest version of the contract — which was amended by the Murphy administration last year, Northstar's "net income" target for qualifying for a full-performance bonus during the 2020 "contract year" is nearly $1.1 billion, meaning it still has a ways to go.

A representative of Northstar New Jersey could not be reached for comment for this story.