Can New Jersey contribute the entire state lottery enterprise to certain state pension funds for 30 years to help close the pension funding gap, without violating the state constitution?

Plain-English summary

In 2017, the Christie administration proposed a novel financial maneuver to address New Jersey's enormous unfunded pension liability. The plan was to contribute the entire State Lottery enterprise to specific state retirement systems for a 30-year term. The lottery would be transferred into a newly-created common pension fund called "Fund L." The retirement systems eligible to share in the contribution would be those whose members served in state schools, state colleges and universities, and state institutions, that is, the Teachers' Pension and Annuity Fund (TPAF), the Public Employees' Retirement System (PERS) state portion, and the Police and Fire Retirement System portions for state institution employees.

Governor Christie's chief counsel, Gregory Acquaviva, asked the Attorney General whether this Proposed Transaction was constitutional under New Jersey's Lottery Clause and other state laws. Attorney General Christopher Porrino said yes.

Two constitutional questions had to be answered:

1. State operation and control. The Lottery Clause (N.J. Const. art. IV, § 7, ¶ 2(C)) allows only "State lotteries," which the AG read as requiring state operation and control. The Proposed Transaction preserved this: the Division of the State Lottery within the Department of the Treasury continues to operate the lottery, the State Lottery Commission (with the Governor's appointees) continues to regulate it, and neither the retirement systems nor the Director of Investment have any authority over lottery operations. Per In re Challenge of Contract Award, 436 N.J. Super. 350 (App. Div. 2014), the State Lottery Commission's "power to determine policy and make major business decisions" is what satisfies the state-operation requirement. That structure is unchanged.

2. Use of net proceeds. The Lottery Clause requires that "the entire net proceeds" of the lottery be used "for State institutions and State aid for education." The proposal allocates net proceeds only to retirement systems whose members are or were employees of public schools, state universities and colleges, and state institutions. Pension benefits paid to those members support the people who provided education and state institution services, so the AG concluded the use of net proceeds remains within the constitutional purpose.

The AG was careful to note this is a "novel transaction" and that he could not say with "absolute certainty" how a court would rule on a legal challenge. He expressly conditioned the opinion on the Proposed Transaction's terms not changing materially.

The transaction was enacted by the Legislature later in 2017 (P.L. 2017, c. 98), and the lottery has since been operated for the benefit of the eligible pension systems.

What this means for you

If you are a teacher, state employee, or police/firefighter in an eligible retirement system

The transaction substantially improved the funded status of the eligible pension systems by adding the present value of 30 years of lottery net proceeds (estimated at roughly $13 billion) to system assets. It is not a backdoor reduction of your benefits. The Director of Investment manages the investment of net lottery proceeds (above operational and prize costs) on behalf of the systems consistent with existing fiduciary obligations, and the lottery proceeds get used either to pay current benefits or to invest in support of future benefit obligations.

You should know two structural points: first, the lottery is contributed for a 30-year term, after which the assets revert to the State; second, the State's annual required pension contribution is recalculated to take credit for the amortized value of the lottery contribution. That meant the State's general-fund cash payment into the pension systems could be lower than it would otherwise have been. Whether that is good for you depends on whether you trust 30 years of lottery revenue and whether the lower general-fund contribution leaves the systems vulnerable to future shortfalls.

If you are a state legislator or budget analyst

The opinion is the constitutional foundation that made the transaction possible. The two analytical levers are: (1) what counts as state operation and control of a lottery (the AG looks to the State Lottery Commission's policy authority, not the formal ownership of lottery assets); and (2) how broadly to read "State institutions and State aid for education" in the Lottery Clause (the AG reads it broadly to include pension support for the people who provided those services). Both levers are policy-laden and could be revisited if a court were asked to apply stricter standards.

If the structure ever changes, the opinion is explicit that further review is required. Material modifications to the Proposed Transaction (giving the pension systems direct lottery operational control, expanding eligible recipients to non-education and non-state-institution employees, extending beyond the 30-year term in unusual ways) could exceed the boundaries this opinion drew.

If you are bond counsel, actuarial consultant, or pension counsel

The opinion is the controlling guidance on the constitutional and statutory limits of the Lottery Clause for purposes of structuring lottery-backed transactions. Two doctrinal points worth flagging in your work:

• The AG explicitly rejected reading "State institutions" or "State aid for education" narrowly. Use of net proceeds for pension benefits to people who taught or worked in qualifying institutions counts as a use for those institutions and education. By contrast, using net proceeds to support, say, a non-education general government program would still be off-limits.
• The AG's confidence is express but qualified ("we are unable to say with absolute certainty how a reviewing court would decide a legal challenge"). For opinion-letter purposes, that hedge is meaningful and should be reflected in any reliance you place on this analysis.

If you are a New Jersey taxpayer or public-finance journalist

The transaction was a creative response to the long-running pension underfunding problem, but it did not create new revenue. It used the present value of 30 years of expected lottery net proceeds to reduce the apparent unfunded pension liability and lower the annual required contribution. Whether that is sound policy or a paper transaction depends on your view of the underlying revenue stream, the duration risk, and what happens at year 30 when the assets revert.

The opinion's hedge is significant: a lawsuit by a taxpayer, a teacher, a competing pension claimant, or a charitable beneficiary of the lottery (if any could claim standing) might still test the constitutional theory. None has succeeded as of this writing.

Common questions

Q: What does "the entire net proceeds" of the lottery have to be used for under the constitution?
A: "State institutions and State aid for education," excluding adult criminal correctional and juvenile delinquency institutions (added by 1999 amendment).

Q: Who actually operates the New Jersey lottery now?
A: The Division of the State Lottery within the Department of the Treasury continues to operate the lottery day-to-day. The State Lottery Commission, with Governor-appointed members and now including the Director of the Division of Investment, regulates it. The contribution to Fund L did not move operations out of state hands.

Q: How long does the contribution last?
A: Thirty years. After the term ends, the lottery enterprise (and its assets and liabilities) returns to the State.

Q: Which retirement systems benefit?
A: Systems whose members are or were employees of public schools, state colleges and universities, and qualifying state institutions. In practice, this includes the Teachers' Pension and Annuity Fund (TPAF), the State portion of PERS, and the Police and Fire Retirement System portions tied to state institution employment.

Q: Does this mean the State stops contributing to the pension systems?
A: No. The State's annual required contribution gets recalculated to take credit for the amortized value of the lottery contribution, which lowers but does not eliminate the State's cash contribution.

Q: Could a court still strike this down?
A: Theoretically yes. The AG's opinion conceded uncertainty: "we are unable to say with absolute certainty how a reviewing court would decide a legal challenge." No challenge has succeeded so far, and the Legislature enacted the implementing statute in 2017.

Q: Does the transaction violate prize-payout or other lottery rules?
A: No. The Proposed Act preserves the existing requirement that net proceeds (revenue net of prizes and operating costs) be at least 30% of gross proceeds. The State Lottery Commission still adopts lottery rules and approves all games.

Q: What changed about the State Lottery Commission?
A: The Director of the Division of Investment was added as a member, bringing the Commission to seven members. All other Governor-appointed members continue.

Background and statutory framework

New Jersey's gambling history is unusually constitutional. The Constitution of 1844 banned lotteries outright, and a 1897 amendment broadened that to all gambling. A 1939 amendment carved out an exception for pari-mutuel wagering on horse racing. The 1947 Constitution generally maintained the status quo, with the Gambling Clause (now art. IV, § 7, ¶ 2) requiring voter approval at a special or general election before any new form of gambling could be authorized. A 1953 amendment let the Legislature authorize bingo and raffles by veterans, charitable, religious, civic, fraternal, and other non-profit groups.

The 1969 Lottery Amendment added subparagraph (C) to authorize the Legislature to "authorize the conduct of State lotteries restricted to the selling of rights to participate therein and the awarding of prizes by drawings when the entire net proceeds of any such lottery shall be for State institutions and State aid for education." Voters approved the amendment 81% to 19%. A 1999 amendment added that net proceeds may not support adult correctional or juvenile delinquency institutions or programs.

The Lottery Clause's two operative requirements were "State lotteries" (state operation and control) and "the entire net proceeds . . . for State institutions and State aid for education." Contemporaneous evidence informs both prongs:

• For state operation, the legislative history of the implementing statute (L. 1970, c. 13, codified at N.J.S.A. 5:9-1 to -25) explicitly stated the Legislature's intent "to carry out the mandate" of the Lottery Clause "by establishing a lottery to be operated by the State." The Lottery Planning Commission's February 1970 report described essentials: a Governor-appointed bipartisan commission, an executive director with operational authority, annual audits, a 30% net-proceeds floor, and licensing of sales agents. Federal law's parallel concept of "state-conducted" lotteries (18 U.S.C. § 1307(b)) generally tracked these features.
• For "State institutions" at the 1969 baseline, the term meant institutions under the Department of Institutions and Agencies (later reorganized into Department of Human Services), which encompassed long-term care, psychiatric, and developmental facilities under N.J.S.A. 30:1-7. The contemporary statutory list at N.J.S.A. 18A:60-1.1 also addresses state institutions within the Departments of Corrections, Children and Families, and Human Services.
• For "State aid for education," no distinction between primary, secondary, and higher education appears in the constitutional text, and the Legislature has historically allocated lottery net proceeds to a wide range of educational programs (Department of Agriculture school nutrition; Department of Education school construction, assessment, and special needs services; higher education tuition aid grants, capital improvement, scholarships, and bond debt service for HEFT and CIF Bonds).

The AG's reasoning relies heavily on In re Challenge of Contract Award Solicitation No. 13-X-22694, 436 N.J. Super. 350 (App. Div. 2014), which had upheld a private vendor's role in lottery sales management on the ground that the State Lottery Commission and the Director of the Division of the State Lottery retained the "power to determine policy and make major business decisions." That decision lets state operation be defined functionally (who controls policy and major decisions) rather than formally (who owns the assets), which is the conceptual move that allows the lottery enterprise to be contributed to a pension fund without losing its "State lottery" character.

The "State institutions and State aid for education" prong is harder. The AG concluded that paying pension benefits to employees and retirees of public schools and state institutions counts as a use "for" those institutions and for education, because the pension obligations were earned by those employees in service to those institutions. This is a generous reading and is the part most likely to draw a constitutional challenge.

The opinion is part of a broader pattern of using state assets to address pension underfunding. The Lottery Enterprise Contribution Act, P.L. 2017, c. 98, enacted the Proposed Act later in 2017. Subsequent valuations and audits have implemented the structure: lottery operations remain at the Division, lottery net proceeds flow to Fund L, and the Director of Investment manages the investment of those proceeds within fiduciary norms.

Citations and references

Constitutional provisions:
- N.J. Const. (1844), art. IV, § VII, ¶ 2 (original lottery prohibition)
- N.J. Const. (1947), art. IV, § 7, ¶ 2 (Gambling Clause)
- N.J. Const. (1947), art. IV, § 7, ¶ 2(A), 2(B) (bingo and raffle exception)
- N.J. Const. (1947), art. IV, § 7, ¶ 2(C) (Lottery Clause, as amended in 1969 and 1999)

Statutes:
- L. 1970, c. 13 (State Lottery Law)
- N.J.S.A. 5:9-1 to -25 (codified Lottery Law)
- N.J.S.A. 18A:60-1.1 (state institutions)
- N.J.S.A. 30:1-7 (psychiatric and developmental facilities)
- N.J.S.A. 30:4-136 to -177.42 (specific state institutions)
- L. 2016, c. 10 (FY 2017 Appropriation Act, lottery proceeds allocations)
- 18 U.S.C. § 1307(b) (federal mailing/transport exemption for state lotteries)
- L. 2017, c. 98 (Lottery Enterprise Contribution Act, enacted after this opinion)

Cases:
- Atl. City Racing Ass'n v. Attorney Gen., 98 N.J. 535 (1985), gambling constitutional history; weight given to contemporaneous legislative statements
- In re Challenge of Contract Award Solicitation No. 13-X-22694 Lottery Growth Mgmt. Servs., 436 N.J. Super. 350 (App. Div. 2014), state-operation requirement is satisfied by State Lottery Commission's policy and major-business-decision authority

Other authorities:
- Report of the State Lottery Planning Commission (Feb. 9, 1970)
- Report of the House Judiciary Committee on H.R. 6668, H. Rep. No. 93-1517 (Dec. 4, 1974)

Source

• Original PDF: https://www.nj.gov/oag/oag/ag-opinion-2017-1.pdf

Original opinion text

State of New Jersey
OFFICE OF THE ATTORNEY GENERAL
DEPARTMENT OF LAW AND PUBLIC SAFETY

CHRIS CHRISTIE, Governor
KIM GUADAGNO, Lt. Governor
CHRISTOPHER S. PORRINO, Attorney General
PO Box 080, Trenton NJ 08625-0080

May 11, 2017

Gregory L. Acquaviva
Chief Counsel
Office of the Governor
125 West State Street
Trenton, New Jersey 08625

Formal Opinion No. 1-2017

Re: Contribution of the State Lottery Enterprise to Certain State Retirement Systems

Dear Chief Counsel Acquaviva:

You have requested a legal opinion on whether the proposed contribution of the State Lottery to certain State retirement systems ("Proposed Transaction") would violate the State Constitution. Based on our current understanding of the Proposed Transaction, you are advised that it comports with the State Constitution and other applicable state laws.

Our understanding of the Proposed Transaction and the draft legislation to effectuate the Proposed Transaction ("Proposed Act") is as follows:

The Administration proposes to contribute the State Lottery enterprise to certain retirement systems and deposit it into a newly created common pension fund ("Fund L") for a term of thirty years. The Proposed Act will define which retirement systems are eligible to receive a portion of the contribution by virtue of their members' past or present employment in the State's schools and State institutions, in keeping with the constitutional dedication of net lottery proceeds discussed below.

The Proposed Act will direct the State Treasurer to make the lottery contribution. The Lottery Contribution and all proceeds of the Lottery Enterprise shall be allocated among the Retirement Systems in the Allocable Percentages (as such term is defined in the Proposed Act), which were determined based on (a) the relative percentages of the total actuarial accrued liabilities of the eligible Retirement Systems (as such term is defined in the Proposed Act); (b) the relative percentages of the total actuarial accrued liabilities of the Eligible Member (as such term is defined in the Proposed Act) portions of such Retirement Systems; (c) the relative percentages of the total unfunded actuarially accrued liabilities of the eligible Retirement Systems; (d) the relative percentages of the total unfunded actuarially accrued liabilities of the Eligible Member portions of such Retirement Systems; (e) the relative percentages of the total number of members in each eligible Retirement System; and (f) the relative percentages of Eligible Members participating in each such Retirement System.

Although the entirety of the Lottery enterprise will be contributed to Fund L, there will be no material change in its operation and management. The Proposed Act will direct that operation of the State Lottery remain with the Division of the State Lottery, which will continue in its existing form as a division within the Department of the Treasury. The State Lottery Commission will continue to have seven members, but the Proposed Act will add the Director of the Division of Investment as a member of the Commission. The State Lottery Commission will continue to exercise regulatory oversight over the State Lottery by adopting lottery rules and approving all games.

With the exception of a few retained assets and liabilities (such as annuities purchased to pay previous prize winners), all of the assets and liabilities of the State Lottery, including all State Lottery intellectual property, will be conveyed as part of the Proposed Transaction for the term of the lottery contribution. The intellectual property will continue to be used by the Division of the State Lottery under a no-fee license provision in the Proposed Act.

During the term of the lottery contribution, the gross proceeds of the State Lottery will be paid into an operating account within Fund L for payment of operational and administrative costs. The operating account will be managed by the Division of the State Lottery. The Division of the State Lottery will, on a periodic basis, transfer into a second account, the investment account, State Lottery proceeds net of operating and administrative expenses, including prize payments. Consistent with existing State law, annual lottery net proceeds must be at least 30% of gross proceeds. These net proceeds may be used by each retirement system for payment of benefits to eligible members, or may be invested on behalf of the retirement systems by the Director of the Division of Investment consistent with the Director's existing fiduciary obligations. In all other respects, neither the Director of the Division of Investment nor the State Investment Council will have any responsibility or authority over operation of the State Lottery, and neither will have any supervision over or use of the operating account.

The lottery contribution will take effect when the Treasurer delivers a "Memorandum of Lottery Contribution" ("Memorandum") to the Director of the Division of Investment. The Memorandum will include detailed schedules of all the State Lottery assets and liabilities conveyed to Fund L. The Director will acknowledge the lottery contribution to Fund L, but will have no discretion to reject or condition receipt of the lottery contribution.

The Proposed Act will account for valuation of the lottery contribution, and for re-calculation of the funded ratio of the eligible retirement systems to reflect the lottery contribution. The Proposed Act will also provide for an adjustment of the State's annual required contribution based on the amortized value of the lottery contribution in each year of the term of the lottery contribution.

I. The Lottery Clause of the New Jersey Constitution

New Jersey's constitutional restrictions on gambling go back to the Constitution of 1844, which provided that "[n]o lottery shall be authorized by this state; and no ticket in any lottery not authorized by a law of this state shall be bought or sold within the state." N.J. Const. (1844), art. IV, § VII, ¶ 2. The 1844 Constitution was amended in 1897 to prohibit all gambling, and then again in 1939 to make an exception for pari-mutuel wagering on horse racing. See Atl. City Racing Ass'n v. Attorney Gen., 98 N.J. 535, 540-41 (1985).

In the 1947 Constitutional Convention, gambling was the most debated issue, with the delegates ultimately deciding to more or less maintain the status quo. Id. at 542-44. As adopted in 1947, the Gambling Clause of the Constitution provided that:

No gambling of any kind shall be authorized by the Legislature unless the specific kind, restrictions and control thereof have been heretofore submitted to, and authorized by a majority of the votes cast by, the people at a special election or shall hereafter be submitted to, and authorized by a majority of the votes cast thereon by, the legally qualified voters of the State voting at a general election.

[N.J. Const. art. IV, § 7, ¶ 2.]

This provision was amended in 1953 to provide an exception to the general prohibition on gambling to allow for bingo games and raffles held by veterans, charitable, religious, civic, fraternal, and other non-profit organizations. See id. at ¶¶ 2(A), 2(B).

Beginning in 1959, the Legislature considered proposing a further amendment to the gambling provisions of the Constitution to authorize a State lottery. In 1969, the question was put to the voters, who approved the amendment by a vote of 81%. In re Challenge of Contract Award Solicitation No. 13-X-22694 Lottery Growth Mgmt. Servs., 436 N.J. Super. 350, 361 (App. Div. 2014).

As adopted in 1969, the Lottery Clause provided that:

It shall be lawful for the Legislature to authorize the conduct of State lotteries restricted to the selling of rights to participate therein and the awarding of prizes by drawings when the entire net proceeds of any such lottery shall be for State institutions and State aid for education.

[N.J. Const. art. IV, § 7, ¶ 2(C).]

The Lottery Clause has only been amended once since, in 1999, to provide that lottery net proceeds may not be used in any way for the support of institutions, facilities, or programs for adult criminal offenders or juveniles adjudged delinquent. Ibid.

The Lottery Clause permits the Legislature to authorize "State lotteries." Ibid. (emphasis added). While the Constitution does not explain what "State lotteries" means, sources contemporaneous to the adoption of the Lottery Clause make clear that the phrase means State operation and control of the State Lottery. See L. 1970, c. 13, § 2 (codified at N.J.S.A. 5:9-2) (noting Legislature sought "to carry out the mandate" of Lottery Clause "by establishing a lottery to be operated by the State" (emphasis added)). Courts have long given "virtually contemporaneous[]" statements of intent such as these great weight when construing the gambling provisions of the State Constitution. See Atl. City Racing, supra, 98 N.J. at 548.

A recent Appellate Division case, although it arose in a slightly different context, also provides some guidance on what "State lotteries" means. See Challenge of Contract Award, supra, 436 N.J. Super. 350. There, the court held that "the power" of the State Lottery Commission and the Director of the Division of the State Lottery "to determine policy and make major business decisions" concerning the Lottery satisfied the State-operation requirement of the Lottery Amendment. Id. at 369.

The characteristics of a state-conducted lottery are also described in federal law, notably in contemporaneous federal legislative history. Federal Criminal law forbids interstate mailing and transport of lottery tickets and paraphernalia except by lotteries "conducted by" a state acting under the authority of state law. 18 U.S.C. § 1307(b). This exemption was passed by Congress in 1975, in close time to the passage of New Jersey's Lottery Clause. The history and interpretation of the federal law distinguishes lotteries run by state entities for the public benefit from private, for-profit lotteries long associated with corruption and fraud. The general model for the state lottery was understood to consist of a structure of an appointed advisory commission with operating responsibilities, and an executive director with a free hand in running the day-to-day operation. Tickets are distributed on consignment to authorized banks and sales agents, who are licensed by the state after careful scrutiny. The tickets are sent through the banks to the sales agents, and unsold tickets and revenues are returned to the state, less a 5 or 6 percent commission for the agents and a 1/2 or 1 percent commission for the banks, which also benefit from the use of the funds. Prize payments generally equal 45 percent of gross revenue receipts. The remainder is returned as net revenue to the state after operating expenses are subtracted.

[Report of the House Judiciary Committee on H.R. 6668, H. Rep. No. 93-1517 at 15 (December 4, 1974).]

State-conducted lotteries are notable for their reliability and absence of fraud: "[A]ll tickets are fully accounted for at all times by a central computer, and a dual auditing system accounts for the flow of revenues at each step of the operation." Ibid. State-operated lotteries that dedicate net revenues to "the public good," ibid., are distinguished from those operated for private profit "with no guarantee that undesirable elements would not profit as licensees, [which] could lead to criminal involvement in gambling," id. at 21. These federal guideposts on what is a state-conducted lottery are generally consistent with the legislative history and interpretation of New Jersey's Lottery Clause described above.

The Proposed Transaction addresses the requirement of State conduct and operation of the State Lottery in several ways. First, the Proposed Act provides that the Division of the State Lottery and the State Lottery Commission will continue to operate the State Lottery as they are presently doing. The State Lottery Commission will have exclusive authority to adopt rules and approve all games, and the eligible retirement systems will have no direct regulatory control over the State Lottery. The Director of the Division of the State Lottery will still be appointed by the Governor with the advice and consent of the Senate. The Governor will also continue to appoint all of the other State Lottery Commissioners. Therefore, despite the transfer of the State Lottery to Fund L, the State through the Division of the State Lottery and the State Lottery Commission will retain responsibility for "policy and major business decisions." See Challenge of Contract Award, supra, 436 N.J. Super. at 369.

The Lottery Clause also provides that "the entire net proceeds" of the Lottery must be used "for State institutions and State aid for education" (but may not support juvenile or adult correctional facilities or programs). N.J. Const. art. IV, § 7, ¶ 2(C). With respect to "aid for education," it is notable that no distinction between primary, secondary, and higher education is made, and that this broad term was chosen rather than a more limited term such as "State educational programs" or "State educational institutions." This suggests that Lottery net proceeds may be used to fund any State initiatives and programs that support education at any level.

This is consistent with the allocation of Lottery net proceeds by the Legislature in recent years, with monies appropriated for education as follows: (1) to the Department of Agriculture for school nutrition programs; (2) to the Department of Education for the benefit of the Governor's School, the Marie Katzenbach School for the Deaf, non-public school aid, school construction and renovations, and the Statewide assessment program; and (3) to programs for higher education including tuition aid grants, scholarship program aid, and various capital improvement, county college operating aid programs, debt service on Higher Education Capital Improvement Fund Bonds ("CIF Bonds") and Higher Education Facilities Trust Fund State Contract Bonds ("HEFT Bonds"), and services for students with special needs. See, e.g., Fiscal Year 2017 Appropriation Act, L. 2016, c. 10.

With respect to "State institutions," at the time the Lottery Clause was approved, that term was understood to mean those institutions under the Department of Institutions and Agencies (later reorganized as the Department of Human Services), defined as "long-term care facilities, institutions, and psychiatric facilities." See N.J.S.A. 30:1-7 (providing specific list of psychiatric hospitals and developmental centers); see also N.J.S.A. 18A:60-1.1 (discussing "State institutions within the Department of Corrections, the Department of Children and Families, and the Department of Human Services"); N.J.S.A. 30:4-136 to -177.42 (discussing various State correctional, mental health, and treatment facilities under the category of "Specific Institutions"). Based on these statutory definitions and contemporaneous usage, it is clear that, under the State institutions prong of the Lottery Clause, lottery net proceeds may be used to support State-run residential facilities that provide psychiatric, developmental, and public health services. This interpretation is also consistent with the Legislature's history of appropriating lottery net proceeds to aid (1) the State psychiatric hospitals, (2) centers for the developmentally disabled, and (3) homes for disabled veterans. See, e.g., L. 2016, c. 10.

The Proposed Transaction contemplates that the contribution of the State Lottery shall be allocated only to members of the retirement systems who are employees or retirees of public schools, State universities and colleges, or State institutions that meet the criteria described above. These State employees are a key part of providing education and running State institutions.

II. The New Jersey Lottery Statute

Contemporaneously with the Lottery Amendment, the Legislature through a joint resolution created the Lottery Planning Commission to prepare a report on the operation of state lotteries and draft legislation for the conduct of a New Jersey lottery. The adopted State Lottery Law, L. 1970, c. 13 (codified at N.J.S.A. 5:9-1 to -25), was the statute submitted by the Lottery Planning Commission to the Governor and Legislature in its February 1970 report. See Report of the State Lottery Planning Commission (Feb. 9, 1970). Because of its enactment contemporaneous with the constitutional amendment, the State Lottery Law is entitled to particular interpretative weight with respect to the intent of the Lottery Clause. Atl. City Racing, supra, 98 N.J. at 548. The Lottery Planning Commission's report, as a contemporaneous statement of the legislation's drafters, is entitled to similar weight.

Two key concerns of the Lottery Planning Commission, as expressed in its report, were that the lottery be conducted in an ethical and responsible manner to "preserve the full trust and confidence" of the citizens of the State, and that its operational structure provide maximum flexibility to allow for the various adjustments that might be needed in order to maximize lottery net proceeds. See Report at 4-5, 8. Features of the State Lottery Law designed to protect public confidence include appointment of key State Lottery officials by the Governor, appointment of a bipartisan lottery commission, id. at 6, conduct of an annual audit, id. at 7, and a statutory requirement that, in the allocation of the lottery's gross proceeds between operating expenses, payment of prizes, and support for education and State institutions, a minimum of 30% of gross proceeds would go to education and institutions, id. at 12-13. Features of the State Lottery Law designed to promote flexibility and allow for maximization of net proceeds include giving the Director of the Division of the State Lottery and State Lottery Commission substantial discretion with respect to lottery operations, including prices of tickets, frequency of drawings, manner of determining winners, and structure of prizes. Id. at 4-5.

The Proposed Act makes several amendments to the existing State Lottery Law for the term of the lottery contribution, including the right of the Director of the Division of Investment to request an audit of the State Lottery on behalf of the retirement systems. In addition, in order to effectuate the contribution of the State Lottery, the Proposed Act provides that lottery operating funds, reserves, and net proceeds will be held in Fund L within the Division of Investment, rather than in the State Lottery Fund within the Division of Treasury created by the State Lottery Law. These statutory amendments do not alter any of the principal operational features of the State Lottery that the Lottery Planning Commission saw as key to effectuating the goals of the Lottery Clause of the State Constitution.

III. Conclusion

Given that this is a novel transaction and in light of the uncertainties associated with litigation in general, we are unable to say with absolute certainty how a reviewing court would decide a legal challenge to the Proposed Transaction. However, based on our understanding of the Proposed Transaction and Proposed Act, we believe that they comport with the State Constitution and other applicable state laws. Please note that should any material terms of either the Proposed Transaction or the Proposed Act change, we advise you to request that we review such changes to determine whether they are prohibited.

Sincerely,

Christopher S. Porrino
Attorney General of New Jersey