May 19 election: Proposition 1C makes a bet on future lottery sales |

May 19 election: Proposition 1C makes a bet on future lottery sales

SACRAMENTO ” While tax increases and spending caps have dominated the debate over California’s upcoming special election, Proposition 1C is the ballot measure that will have the greatest immediate effect on the state budget.

Gov. Arnold Schwarzenegger and legislative leaders say the Lottery Modernization Act will boost the lottery’s revenue through the promise of larger jackpots. That is intended to attract investors who would lend California $5 billion in the coming fiscal year in return for a slice of the pumped-up profits over the next two to three decades.

If voters agree to change the 25-year-old lottery law, the state also would have authority to borrow even more money against future lottery revenue without going back to the voters.

“It’s an authority to borrow money,” said Fred Silva, senior fiscal adviser at California Forward, a bipartisan group of business, political and labor leaders that is seeking a solution to the state’s structural problems.

The group’s leadership council endorsed all the propositions, including Proposition 1C.

If voters don’t buy into this piece of the budget package, California’s deficit ” already expected to be $8 billion in the coming fiscal year ” will grow by $5 billion. So far, voters seem unimpressed with this borrowing strategy.

Of the six measures on the May 19 special election ballot, Proposition 1C faces the greatest resistance. A recent Field Poll suggested the measure was trailing 59 percent to 39 percent among likely voters, indicating a low appetite for more borrowing, pollster Mark DiCamillo said.

The antipathy also may be a product of the source of the money: California essentially is asking its residents to gamble more as a way to solve the state’s fiscal problems. It also could be a factor of the proposition’s complexities and long-term consequences.

On the surface, Proposition 1C looks like a logical step: Attract more players to the state’s lottery, give investors a slice of the increased revenue in exchange for $5 billion and then pour the borrowed money into the state’s general fund to help cover next year’s deficit.

Critics point out the potential downsides that are contained in the details of the plan.

If the measure passes, California taxpayers would have to pay the investors $350 million to $450 million a year for 20 to 30 years from lottery profits, according to the nonpartisan legislative analyst. The total payback to investors would range from $7 billion to $13.5 billion.

The rest of the lottery profits would go to the state’s general fund or to pay down debt. Under existing law, lottery profits go toward education, a practice that would end if voters approve Proposition 1C. Under the measure, the state’s general fund would make up for the lost lottery revenue to schools.

The problem is that the lottery profits remaining each year after the investors are paid off would not be enough to make up for the money the schools have lost, according to the legislative analyst. This would put further pressure on California’s general fund and complicate efforts to balance the budget in the future.

“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,” the legislative analysis said.

The independent review does not address a scenario in which the revenue projections are inaccurate and the lottery fails to generate sufficient money to pay back the investors.

Lawmakers who support the measure say they had few other choices given the state’s financial condition.

“It’s not at all a perfect way to budget,” said Senate Minority Leader Dennis Hollingsworth, R-Temecula. “We need to have actual spending in line with actual revenue, so it would be a stopgap measure.”

Hollingsworth is among Republicans who oppose Proposition 1A, which would create a spending cap while extending temporary increases in the sales, income and vehicle taxes, but support Proposition 1C.

“Not only will it improve an existing asset, but it will bring in at least $5 billion to help minimize the impact of cuts to schools, health care, public safety and transportation without raising taxes,” said Julie Soderlund, spokeswoman for Budget Reform Now, the campaign supporting all six ballot propositions.

Any changes to the state lottery require voter approval because it was established through the initiative process when voters passed Proposition 37 in 1984.

Proposition 1C does not authorize the lottery to make changes in the technology or machines currently in use, although the Legislature could do so in the future with a two-thirds vote. Instead, the measure allows the lottery to increase the amount of revenue it returns as prizes, which in turn is designed to entice people to play more often.

Californians spend an average of $83 a year on lottery tickets, less than the $105 average in states west of the Mississippi.

The Legislative Analyst’s Office found that other states were able to improve ticket sales by offering larger jackpots. In 2002, Florida changed prize payouts and saw lottery sales improve after five years.

For California, the legislative analyst projected that higher payouts “could result in future lottery sales being somewhere between 30 percent and 80 percent higher.”

Approved by voters in 1984, California’s lottery currently generates about $3 billion a year, about a third of which is dedicated to public schools.

The Schwarzenegger administration has called the lottery an underperforming state asset and has been seeking to get more from it. Two years ago, the Republican governor proposed leasing the lottery, but that plan was shelved.

Should Proposition 1C pass, it’s unclear whether private investors will find the lottery plan appealing, especially during a recession that has restricted consumer spending. Ticket sales in 2009 are down 6 percent over the same period a year ago.

Jason Dickerson, an analyst at the Legislative Analyst’s Office, said no other state has borrowed this much at once from its lottery. Florida, West Virginia and Oregon have borrowed against their lotteries for school construction. California would be the first to use the state asset for deficit financing.

Opponents say Proposition 1C is bad public policy ” fiscally, socially and economically.

The Rev. James Butler, executive director of the California Coalition Against Gambling Expansion, said expanding gambling, even in the form of a lottery, will invite social and economic ills.

Asking people to bet more of their money could lead to increased bankruptcies, homelessness, crime and unemployment, he said.

“It’s built on the premise that Californians do not spend enough money on the lottery,” Butler said. “It is a mistake.”

He also said voters should be wary of Proposition 1C’s fine print, which hands the governor and lawmakers the power to expand the lottery and conduct future borrowing without voter consent.

The Yes on 1C campaign says such flexibility is needed to make long-term investments in new equipment and games.

Supporters, including the California Teachers Association and the lottery’s main vendor GTECH, say California would be forced to lay off teachers and other workers without the measure.

GTECH and the Service Employees International Union, which represents employees of the California State Lottery, have contributed $1 million each to pass Proposition 1C, according to recent campaign records.

GTECH made $46.2 million last year from its contract with the state and stands to make $95.4 million if lottery sales double, according to state officials.

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