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Proposition 1C

Funding Boost, or Lottery Boondoggle?

By Vernon M. Billy - May 1, 2009

This article continues our series on the budget and education ballot measures included on the May 19th statewide special election.  Please note that these articles will be lengthier than some of our normal articles.

As a part of the hard-fought February budget deal, the Governor and Legislature agreed to place six measures – Propositions 1A through 1F – before the voters.  Collectively, these propositions would establish a new budget spending cap, repay schools almost $9.3 billion, securitize lottery revenue, shift mental health funding and limit legislative salaries in budget deficit years.

Proposition 1C is a key component of the 2009-10 state budget compromise that was hammered out during the winter months in Sacramento.  Proposition 1C  would allow the State to borrow against $5 billion in future California Lottery profits during the budget year in order to close the state’s whopping $41 billion, 17-month budget deficit.

Under current law, the lottery is required to use lottery profits to provide at least 34 percent of the amount generated from lottery sales to education.  In 2007-08, the lottery generated approximately $1.1 billion in funding for education in California. 

While $1.1 billion is a significant contribution to the education of students in California, it nonetheless represents only about one percent of the revenues received by school agencies statewide.

Under Proposition 1C, the lottery would no longer be required to dedicate funding for education.  Instead, the state would be required to fund the $1.1 billion currently provided to schools from its General Fund based on the amount funded by the lottery in 2008-09.  The state would also be required to provide a Cost of Living Adjustment (COLA) and adjust funding based for student enrollment growth.

In future years, as this funding is adjusted for COLAs and enrollment growth, the new General Fund payments for K-12 schools and community colleges would become part of Proposition 98 funding.  This additional funding will result in a higher Proposition 98 minimum guarantee than would exist absent Proposition 1C.

In addition, future lottery profits would also be used to repay investors (with interest) over time.  The state would also be free to borrow against future lottery profits in subsequent budget years.

While this borrowing may help alleviate the state's immediate budget shortfall, it also increases costs to the state by as much as $450 million due to the new debt service payments that would have to be made until the $5 billion in borrowing for the 2009-10 budget, plus interest has been fully paid.  These payments, however, could also be paid from the profits received by the Lottery.

In the crafting of Proposition 1C, policymakers acknowledged the additional debt-service costs and the need to pay down other existing debt by establishing a Debt Retirement Fund (DRF).  Under the proposition, lottery profits not needed to pay off lottery borrowing would be transferred to the DRF to pay other state expenses such as debt-service costs on bonds and other debts.

Proposition 1C may provide a short-term relief to the state's budget crisis and provide a significant funding boost to schools over time as more than $1 billion is added to the Proposition 98 minimum guarantee, along with COLA and growth funding.  However, this same funding could ultimately be a factor in future years for calls to suspend Proposition 98 if the state’s economy continues to wane and additional funding reductions are needed.

At least under California's state constitution, education funding from the Lottery is protected.  Proposition 1C eliminates that protection and provides more than a billion dollars for state budget writers to target for future cuts if needed.

Funding boost, or boondoggle… decide on May 19th.

Editor's Note: Vernon Billy is President of Governmental Solutions Group, LLC,a policy consulting and legislative advocacy firm.