Opinion: Betting on the state lottery
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Proposition 1c is the scratch-off lottery card on the May ballot. Some of my colleagues think of the proposition, which would authorize the state to borrow $5 billion against the California lottery’s future profits, as more of a scratch-n-sniff card, and they don’t like the aroma. But the right way to evaluate 1c is to think of it as a wager, with the potential to bring more revenue into state coffers -- or spill more red ink for years to come. But that isn’t necessarily a reason to vote against it, given that the deal is a certain winner for the state’s public schools and colleges.
There are three basic pieces to 1c. The first allows the state to securitize the lottery revenue, meaning that it can sell investors the rights to future lottery profits. Sacramento would raise $5 billion this way as part of the compromise that legislators and Gov. Arnold Schwarzenegger struck in February to eliminate a $42-billion budget gap, and theoretically the state could raise more in future years. The second loosens some of the strictures on the lottery, most notably the one limiting prizes to half the proceeds from ticket sales. And the third piece brings the lottery’s profits into the state’s general fund (or more precisely, an account called the Debt Retirement Fund), instead of dedicating them to the schools. To mollify education advocates, though, 1c would increase aid to education in 2009-2010 by same amount that schools receive from the lottery in 2008-09, adjusted for increases in the cost of living and the student population. That additional amount would then grow annually at the same rate as Proposition 98 funding.
The purpose of 1c is to spend money that the state doesn’t have in lieu of making deeper cuts in services or raising taxes even higher. In that sense, it’s no different from any other kind of borrowing. And as with borrowing in general, spending future revenue today makes a certain amount of sense for financing big capital projects, but it’s nutty for ongoing services ... unless you believe that the state’s financial problems are just temporary.
Issuing securities backed by lottery revenues has one big advantage over bonds: It shifts the risk from taxpayers to investors. If lottery sales continue to drop, investors aren’t paid back as quickly as they would if sales held steady or increased. The disadvantage is the state might have to pay investors in the lottery 6% interest, while bonds would carry a rate around 4% -- assuming that the state could sell any, which it’s having trouble doing in this environment.
I have little doubt that the state can boost the lottery’s appeal and revive flagging sales. The average Californian spends a mere $83 annually on lottery tickets, less than half the average for all states with lotteries (a figure that is admittedly skewed by lotto-crazed residents of Massachusetts, whose dreams of winning enough money to move to California lead them to drop about $2 a day on state-sponsored games). Even if you believe a state lottery is a tax on the poor (because, well, it is), there’s no sense in making it an unpopular one. It’s no less morally problematic if fewer people play.
The real gamble here is whether the new, improved lottery can increase sales enough over the long term to keep up with the increased commitment to schools. Under current law, the lottery’s contribution to schools rises or falls with lottery sales. Prop. 1c would remove that flexibility, committing the state to a steadily growing contribution on top of the chunk schools receive from Prop. 98 (which carves off for education more than $4 of every $10 in the state’s budget). I suspect that after a time of increased sales, the lottery’s popularity will start to fade again, eventually slipping beneath the point where lottery profits cover the contribution to education. In other words, in trying to solve today’s budget problem, 1c could create a more enduring one in the future. Then again, if the state keeps selling off future revenue from the lottery to cover budget gaps, as 1c would allow it to do, the lottery will never generate enough money to meet the increased obligation to schools.