Yes on Proposition 1C

Proposition 1C bundles three proposals related to the California Lottery, each with potentially costly or controversial ramifications. One would let the state sell the rights to lottery profits, trading future revenue for cash it can spend today. Another would promise public schools and colleges about $1 billion in extra aid each year in lieu of giving them a share of the lottery’s proceeds. And the third would loosen some of the strictures on the lottery in a bid to revive sales. Beneath the layers of complexity, however, lies a simple purpose: enabling the state to close some of its budget gap by borrowing money. We think that’s a better approach than raising taxes more or cutting programs more deeply.

The proposition would allow the state to raise $5 billion by selling securities based on the lottery. From the state’s perspective, such securities have one big advantage over more conventional bonds: Investors assume all the risk. If lottery sales continue to drop, the buyers of the securities won’t be paid back as quickly as they would if sales increased. The disadvantage is that the securities would carry a higher interest rate than the average state bond, but the bond markets haven’t shown much interest in California’s bonds lately unless they’ve been backed by the federal government.

We’re not enthusiastic about giving lawmakers the power to borrow against every penny of lottery revenue in perpetuity, because we fear that’s what they will do. But if the spending caps in Proposition 1A work as advertised -- admittedly, a big if -- there will be less financial pressure on the state to sell another round of lottery securities after the first one is paid off.

The larger long-term problem may be the move to decouple education aid from the lottery proceeds. Under the current system, when lottery sales drop, so does the aid to schools. Proposition 1C, however, would require that public schools and colleges receive the same amount in 2009-2010 as they do in the current school year, adjusted upward for increases in the cost of living and student population. After that, the amount would rise in tandem with other state funding for schools. If the bottom were to drop out of lottery revenues, the state would have to find other funding sources to cover the extra payment to schools. But then, allowing the state to borrow against future lottery revenue means it will have to find other funding sources for that aid regardless of what happens with ticket sales.

We acknowledge the dubious morality of having the state encourage people to gamble more, especially when research shows that the poor spend disproportionately on lotteries. But the state doesn’t need to sell more scratch-off tickets to raise billions from investors. More important, the poor would be the ones most likely to be squeezed if the state weren’t able to narrow the budget gap by borrowing against the lottery.

The Times urges a yes vote on Proposition 1C.