Proposition 1C
Lottery Modernization Act
Legislative Constitutional Amendment and Statute
Background
Lottery Operations. Proposition 37, approved by the voters in 1984, created the California State Lottery (the "lottery") and the California State Lottery Commission (the "Commission"). The measure provided that 50 percent of lottery ticket sales must be paid out as prizes and that no more than 16 percent of ticket sales can be spent on lottery operating expenses. Lottery profits—the funds remaining after payment of prizes and operating expenses—must be dedicated to public education and paid directly to schools, community colleges and universities. Lottery profits cannot be used to help balance the state budget, and the state cannot borrow from future lottery profits.
Funding Education. In fiscal 2007-08 the lottery sold over $3 billion of tickets, paid out $1.6 billion in prizes, and spent $380 million on operating expenses. The remaining $1.1 billion (lottery profits) were distributed to public educational entities based on their number of students. This represented a very small part of the overall budget of these institutions. For example, for kindergarten through twelfth grade (K-12) schools, lottery profits made up just over 1 percent of all their revenues in 2007-08. Between 1997-98 and 2007-08, lottery payments grew at an average rate of 2.8 percent per year—slightly less than the rate of inflation. However, lottery payments to education have gone up and down over time, including drops in each of the last two fiscal years. By contrast, funding provided under Proposition 98—which makes up about three-fourths of K-12 education budgets—grew at an average rate of 5.6 percent per year during this same time period. Prior to the current fiscal year, Proposition 98 funding had increased every year during the last decade.
The Proposal
Proposition 1C would amend the state Constitution to allow lottery profits to go to education indirectly and to allow borrowing from future lottery profits; it would enact laws to carry out these changes. The Legislative Analyst has summarized key parts of the measure for the official Voter Information Guide (see text box on next page).
Lottery Operations. Proposition 1C would allow the lottery to increase the percentage of lottery funds returned to players as prizes above 50 percent in order to attract more spending for lottery tickets and increase lottery profits. The measure would expand the lottery's flexibility by:
- Limiting the number of contracts with private entities that the Commission must submit for competitive bidding.
- Reducing maximum operating expenses from 16 percent to 13 percent. The lottery now spends less than 13 percent on operating expenses.
- Allowing the lottery to carry over unused operating funds to a future year.
| Current Law | Proposition 1C | |
|---|---|---|
| State borrowing from future lottery profits | Not allowed. | Allows $5 billion in borrowing to help balance the state's 2009-10 budget. Additional borrowing allowed in the future. Repayment from future lottery profits. |
| Lottery prize payouts | Fixed at 50 percent of lottery sales | Flexibility given to California State Lottery Commission to set prizes at a level above 50 percent that generates the most profits. |
| Use of Lottery Profits | Paid to public schools, community colleges, and universities. | Not paid to educational institutions. Proceeds instead are used first to repay state borrowing described above. Remaining profits would be available to benefit the state General Fund by paying state debts and budgetary obligations. |
| School and community college district funding | Annual minimum funding guarantee established by Proposition 98. | An increased Proposition 98 guarantee to make up for districts' loss of payments from lottery profits. |
Proposition 1C makes no changes to existing laws about the types of technologies the lottery may use in its games or the machines it may use to dispense lottery tickets. However, as discussed below, it gives the Legislature the authority to do so. In addition, the lottery would continue to be operated by the state and not by a private company.
Funding Education. Under Proposition 1C, beginning in fiscal 2009-10 lottery profits would no longer be paid directly to public educational institutions. Instead, the state would increase payments to educational institutions from the General Fund to compensate for the loss of those lottery profits. Specifically, the proposition would require the General Fund to make payments to educational institutions in that year equal to (1) the amount of lottery profits paid to these institutions in fiscal 2008-09, plus (2) an adjustment for changes in the number of students and the cost of living. For K-12 schools and community colleges, the General Fund payments in fiscal 2009-10 would be in addition to those already required under the Proposition 98 funding guarantee, while in later years, such new payments would become part of their annual Proposition 98 funding. These future General Fund payments would continue to be adjusted each year for changes in the number of students, as well as in the cost of living, and would be distributed to public educational institutions based on their number of students.
General Fund. Proposition 1C would allow the state to borrow from future lottery profits. In fact, the state budget plan for fiscal 2009-10 relies on the state being able to borrow $5 billion from such profits. Subsequent lottery profits would then be used to repay the investors, with interest. There is no limit imposed on how much state officials may borrow in fiscal 2009-10 or in future years.
In the future, lottery profits not needed to pay off lottery borrowing would be transferred to a new state government account called the Debt Retirement Fund ("DRF"). Funds in the DRF could be used by the Legislature to satisfy other General Fund obligations, including bonds and amounts borrowed from other state funds.
Other Provisions. The proposition would require the lottery to direct $1 million of its funds each year to the state's existing Office of Problem Gambling for its awareness and treatment programs. Currently, the lottery commits about $250,000 per year to this office to help pay for the state's 1-800-GAMBLER problem gambling telephone line.
Currently, the Legislature (with a two-thirds vote) can amend the lottery law to further the purposes of the original 1984 lottery law. This proposition gives the Legislature (still with a two-thirds vote) more flexibility to amend the lottery law in the future. For example, such amendments could authorize new operating rules, games, or devices that increase the lottery's ability to generate profits for public purposes. The Legislature, however, would not be able to amend the parts of this measure that increase state General Fund payments to educational institutions without approval of the voters.
Fiscal Effect
State's 2009-10 Budget Plan. In their February 2009 budget plan, the Legislature and the governor assumed the state would borrow $5 billion from future lottery profits in 2009-10. If voters reject Proposition 1C, the Legislature and Governor will have to balance the budget in another way, probably through billions of dollars of spending cuts, tax increases, or other solutions.
If the state successfully borrows about $5 billion from future lottery profits, annual debt payments of about $400 million a year would be paid from lottery profits before the profits are used for any other purpose. Due to the current "credit crunch," however, the Legislative Analyst is uncertain as to whether California will be able to achieve all of the planned $5 billion lottery borrowing in 2009-10.
Future Strain on the General Fund. Proposition 1C requires increased General Fund payments to education. While the provisions of the measure probably would allow the lottery to generate increased profits, the first priority of the profits would be debt-service payments to investors. The Legislative Analyst says that the remaining profits probably would not be enough to cover the General Fund's higher payments to education for most of the next 20 to 30 years. In the years after the $5 billion borrowing, the Legislature would probably have to identify hundreds of millions of dollars per year in revenue increases or spending decreases to cover these costs.
Proposition 1C allows the state to borrow against future lottery profits at any time in the future. Any such additional borrowing, however, would increase debt-service costs even more and further reduce the portion of lottery profits available to cover the General Fund's higher payments to education. Should state officials decide to borrow more than $5 billion from future lottery profits, budgetary decisions could be more difficult in the years after such borrowing?
Fiscal Effects if the State Never Borrows from Lottery Profits. While the state budget plan assumes $5 billion of lottery borrowing in 2009-10, this measure does not require the state to undertake such a borrowing. If Proposition 1C passes and the state never borrows from future lottery profits, all lottery profits would flow to the DRF and be available to cover General Fund costs, including the required payments to education. The Legislative Analyst says that in such a case it is possible that increased lottery profits would roughly offset the General Fund's increased payments to education in the long term.
Lottery Operations. Californians currently spend an average of $83 a person each year on lottery tickets, considerably less than the $190 national average. California's payout of 50 percent is relatively low compared to other states. Based on evidence from other states, the Legislative Analyst concludes that if Proposition 1C passes, sales could grow between 30 and 80 percent. Profits would grow at a smaller percentage because a higher proportion of lottery funds would be given to players as prizes. Profits could increase by hundreds of millions of dollars a year compared to what they would be under current law. Actual sales and profits would depend on how California consumers react to products offered by the lottery and by decisions made by the Commission and the lottery staff.
Educational Institutions. Under Proposition 1C, schools, community colleges, and universities would no longer receive payments from the lottery. Instead, these institutions would receive higher payments from the state General Fund. These payments would grow over time—likely faster and in a more consistent way than the schools' existing lottery payments.
What A Yes Or No Vote Means
A YES vote means that California could borrow against future lottery profits, enhance the flexibility of the lottery to increase its profitability, and replace lottery payments to education with increased education funding from the General Fund.
A NO vote means the lottery would operate as it does today with profits dedicated to education, and the state would not be able to borrow from lottery profits to help balance the budget.
Supporters Say
- Proposition 1C will allow California to increase lottery revenues without raising taxes.
- If California cannot borrow against future lottery profits, the state will be forced to cut another $5 billion from its budget or to increase taxes by that amount.
- Schools will not lose funding—Proposition 1C guarantees that schools will get at least as much funding as they receive from the lottery today.
Opponents Say
- The lottery should be left as it was originally designed 25 years ago—there is no need to change it. We cannot and should not rely on increased gambling to balance the budget.
- Proposition 1C may actually reduce funding for education, since in the long term lottery profits will not be sufficient to cover the higher payments to education that the measure requires.
- California's credit rating is so poor that it is unlikely to be able to borrow against the lottery, except on terms very unfavorable to the state.
Support And Opposition
Ballot arguments in support are signed by Ed Bonner, President, California State Sheriffs' Association; Dr. Glen W. Thomas, California Secretary of Education; and Bill Hauck, Vice-Chairman, California Business for Education Excellence.
Ballot arguments in opposition are signed by California State Senator Bob Huff.
PRO
Budget Reform Now
California Chamber of Commerce
California Teachers Association
CON
State Senator Bob Huff
California Federation of Teachers
American Federation of State, County and Municipal Employees
For More Information
California Secretary of State
Legislative Analyst's Office
Campaign Finance Information
Ballotpedia
California Budget Project
EdSource
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