Proposition 1C - Selling Bonds From Future Lottery SalesMay 1, 2009
What it does
Proposition 1C amends the Constitution to allow the state to sell $5 billion of bonds backed by future lottery revenues, to help close the 2009-10 deficit. (The state lottery was created in 1984 by a Constitutional voter initiative.) The state could continue such “borrowing” from lottery revenues in future years. Lottery revenues which are now dedicated to kindergarten through university education (a minimum of 34 percent) would be used to pay back the bonds to investors. Prop. 1C would replace the education money that used to come from lottery profits by taking money from the state’s General Fund and guaranteeing annual adjustments. This would increase the base funding for K-14 education, beginning in 2010-11.
Current law fixes lottery prize payouts at 50 percent of lottery sales. Prop. 1C would allow the Lottery Commission to set prizes at a level above 50 percent that generates the most profits, and would permit the Legislature by a two-thirds vote, to introduce new games, rules or devices, and potentially increasing future lottery ticket sales.
Current law also caps lottery operating expenses at 16 percent. Prop. 1C would lower the cap to 13 percent, which is about the actual operating cost. It would increase funding for state gambling awareness and treatment programs, currently about $250,000 per year, to $1 million.
Why it is on the ballot
Prop. 1C is aimed at securing future revenue sources to cover the current state budget deficit. Without it, the governor and Legislature would have to agree to make $5 billion in additional budget cuts and tax increases.
In the future, the changes made by Prop. 1C to lottery operations probably would allow sales and profits to grow above the level allowed under existing law. But after paying debt service to investors, the remaining profits probably would not cover the General Fund’s education payments for most of the next 20 or 30 years, to the tune of hundreds of millions of dollars per year.
Over the long term, the Legislative Analyst predicts that education funding is likely to benefit, by growing faster and more consistently than it would under current law. However, that would reduce the percentage of revenues for programs that lack the guaranteed minimum.
- Prop. 1C is a major component of the 2009 budget balancing compromise. Without it, further budget cuts and/or tax increases will be extremely painful.
- While the amount that goes to education is not a significant component of education funding, it fluctuates a great deal. When voters changed the way education was funded (Prop. 98), a major goal was to smooth the ups and downs. Prop. 1C accomplishes this. Without it, funding levels remain volatile.
- Prop. 1C provides more money to lottery winners, while addressing the potential problems of making it more attractive to players.
- Selling bonds to get quick cash, secured by future revenues, is about the worst way to fund the budget deficit. The Legislative Analyst says that “annual debt service payments to investors could total between $350 and $450 million each year for 20 to 30 years.”
- It is very unlikely that lottery sales would increase quickly and steadily enough to cover the increased General Fund guarantee to education. That could mean up to another $500 million to $900 million in General Fund program cuts.
- Lottery payments only comprise about one or two percent of education funding, are relatively volatile, and in the past decade have had average growth of 2.8 percent a year, which is slightly less than the rate of inflation. During that time, state funding for education grew at an annual average rate of 5.6 percent. Making it more attractive and maintaining the fiction that it does significant educational good is very poor public policy.
Prop. 1C was the most controversial part of this package. SPUR felt compelled by the need to balance the state budget without throwing it back into the toxic legislative process. But we were also concerned that monetization of future revenues to solve a budget problem in one year was a wrong and unsustainable budget practice. Some were troubled by the moral implications of the whole idea, since lottery funding of education is actually tiny, while the public believes it is large. But the decisive issue was the impropriety of using a 30-year revenue stream to solve a one-year problem.
SPUR recommends a “No” vote on Proposition 1C.