Gov.’s plan faces rocky path

Times Staff Writer

Gov. Arnold Schwarzenegger’s plan to borrow against $15 billion in future lottery profits was supposed to be an easy sell, a relatively painless way to help bail the state out of its financial mess. Instead, it is quickly becoming a political liability.

Voters are suspicious of anyone messing with state lotteries, and they’re emotional about it. The only other topic they’re as eager to offer opinions about is sex, according to the national firm Independent Lottery Research, where some of the partners have conducted market research on consumer issues for decades.

“Everyone thinks they have some ownership of the state lottery,” said Michael Jones, a director of the firm.


Californians find the governor’s lottery strategy so distasteful, a recent state poll suggests, that they would rather have their taxes raised. Meanwhile, lawmakers are denouncing the plan as a gimmick, and analysts say it could prove far costlier to the state than Schwarzenegger is letting on.

Voters would have to approve the governor’s proposal. But Mark Baldassare, president of the Public Policy Institute of California, said they meant it when they approved the lottery by ballot measure two decades ago to raise funds solely for schools.

“They don’t see it as money to move around and use for other purposes,” he said.

Administration officials are adamant that schools, the beneficiary of the lottery, would not lose money. Still, the institute released a poll Wednesday showing that only 30% of likely voters support the lottery borrowing (with 8% undecided), while 57% back the 1-cent sales tax increase that Schwarzenegger is grudgingly proposing as a backup if the lottery plan falters.

California’s lottery is one of the more outdated in the country. And last month lottery officials reported that sales were $275 million below projections for the fiscal year ending this month.

Annual ticket sales in the state average $91 per person; the national average is $185. Schwarzenegger contends that adding games, placing electronic ticket machines in big-box stores like Target and making other unspecified improvements would double sales in five to 10 years, producing more than $3 billion a year in new sales. The state would then borrow against the higher revenue to generate $15 billion in instant cash.

“There are some people who say this is exotic, this is gimmickry,” Schwarzenegger said to hundreds of business leaders in Sacramento last month. “There is nothing gimmicky or exotic about it. . . . This is the direction to go, because we don’t want to raise taxes.”

But besides voters, there are other barriers to the governor’s plan. One of the biggest is a ban on the most lucrative type of lottery machines, video lotteries, which operate like slot machines. Most of the 14 states that have them have seen their profits soar.

But California can’t go that route without violating Indian tribes’ gambling pacts with the state. Breaking those agreements could cost the state hundreds of millions of dollars annually in revenue from tribal casinos.

Moreover, well-heeled, politically powerful gambling interests -- including the tribes -- that might be threatened by a more vibrant lottery could fund a major campaign to defeat a lottery measure at the ballot in November.

Alison Harvey, executive director of the California Tribal Business Alliance, said Indian groups with casinos will be monitoring the proposal closely as it moves through the legislative process and -- if it gets that far -- onto the ballot.

“We are watching to see where this ends up,” she said.

Eugene Christiansen, a lottery consultant in New York, said he had not seen the governor’s proposal but was wary of claims that the state could double sales in less than a decade without video terminals.

“These games absolutely would increase lottery revenues,” he said. “There is abundant experience to support that. It is a problem for the California lottery that it can’t add them.”

California’s lottery also has to compete with more numerous and diverse gambling opportunities than lotteries in many other states. The nonpartisan Legislative Analyst’s Office said the governor’s plan makes “overly optimistic and potentially unobtainable assumptions about the ability of the lottery to increase its profits.”

The analyst’s office also pointed out that few states in the West have been able to reach the national average for lottery ticket sales. Of the 18 states west of the Mississippi River that have lotteries, none has ticket sales above the national average. California is one of the most profitable in that group.

Experts offer different theories on why residents in the West are less likely to purchase lottery tickets. Some suggest that lotteries do best in densely populated urban areas where residents walk a lot and are likely to frequent the corner store, a popular place to purchase lottery tickets.

Others note that lotteries are a relatively new phenomenon in the West and aren’t as much a part of the culture as they are elsewhere. Still others cite the stiff competition Western states face from existing casinos. The West is, after all, home to the gambling capital of the country, Las Vegas.

But those who have been advising the state insist that if lotteries in the West were run better, sales would pick up. That’s the bet the administration is willing to make for California.

The cost of losing is steep.

The Legislative Analyst’s Office says that under the governor’s plan, there is a “strong likelihood that distributions to public education from the lottery would fall well short of their current levels, perhaps by $5 billion over the next 12 years combined.”

Even if Schwarzenegger’s proposal worked according to plan and the state were able to double lottery sales within a decade, the cost to taxpayers would still be huge.

To get Wall Street to lend the state the $15 billion against a modernized lottery, Californians would have to pay $23 billion to $30 billion in interest and other borrowing costs over the next 30 years. Baldassare, the pollster, says that alone may explain why voters are unenthusiastic.

“The notion of borrowing to take care of a budget deficit -- the public feels they have been there, done that,” he said. “Four years ago, they approved a $15-billion economic recovery bond as the solution to our multibillion-dollar deficits. Voters were told, ‘Vote this way once and we will never do this again.’ Now we are back to borrowing.”



Times staff writer Patrick McGreevy contributed to this report.