Overview
Proposition 1C: Lottery Modernization Act.
Under lottery securitization, private investors would secure interest in the lottery through the sale of bonds. Bond holders would be repaid with interest over time with lottery revenue that currently goes to K-12 and post-secondary education. Schools and public institutions of higher education would no longer receive revenue from the lottery; instead, state general fund allocations to schools, colleges and universities would be increased, beginning in 2009-10 by an amount equal to their share of lottery revenues in 2008-09.
For K-14 under Proposition 98, the increase is estimated to be roughly $1.1 billion, and this amount would be added to the minimum Proposition 98 guarantee. In the future, this amount will increase with regular Proposition 98 growth.
The sale of lottery bonds is intended to generate a large amount of one-time revenue over the next two years that would be used to retire existing debt. The Administration estimates that bond sales will generate roughly $5 billion in 2009-10 and another $5 billion in 2010-11, for a two-year total of $10 billion. At this time, the actual level of private investor interest in lottery bonds and therefore the amount of revenue that can be raised is unknown and will depend on general conditions in the stock, bond, and money markets as well as on investor confidence that a modernized lottery will generate sufficient revenue for bond repayment.
Impact on schools
The securitization proposal is structured in a way that is supposed to be revenue neutral for schools, by replacing lottery dollars with General Fund/Proposition 98 dollars. Many believe this would be positive for schools because of the current misperception that lottery revenues account for a significant proportion of school revenues.
On the other hand, this change would make schools more dependent on the state General Fund by increasing the state cost of Proposition 98 by an estimated $1.1 billion. Since any appropriation above the Proposition 98 minimum must come from the General Fund, this would make increases to the minimum funding level less likely in the future.
In addition, increasing the state’s share of Proposition 98 by $1.1 billion would mean that there would be a decrease of $1.1 billion available for other state programs, such as health and welfare, higher education, and public safety. This effect will be exacerbated by additional corporate income tax cuts that were enacted as part of the final budget package and that will result in a reduction of General Fund revenue of nearly $1 billion per year beginning in 2010-11, according to the Legislative Analyst.
In the short term, these effects would be mitigated by using lottery revenue, instead of General Fund revenue, for debt service on deficit reduction bonds which would save the General Fund a little more than $3 billion in 2009-10 and nearly $3.5 billion in 2010-11. However, beginning in 2011-12, the General Fund savings from debt service on the deficit reduction bonds would be less than the combined cost of the higher Proposition 98 guarantee and the tax cuts, resulting in tighter budgets in future years. For example, in 2012-13, payments on the deficit reduction bonds will be roughly $300 million; meanwhile, the state cost for Proposition 98 will be more than $1.1 billion higher and the revenue loss resulting for corporate income tax reductions will be $1 billion. The net effect would be more than $1.8 billion less to spend on non-Proposition 98 programs.