Revenue-building campaign needed as governor's bond proposal gains footing
The California state lottery is switching its advertising pitch on nearly two dozen billboards throughout the state, a modest attempt to boost ticket sales.
But the sales campaign will have to get much more aggressive if the lottery is going to pay off Gov. Arnold Schwarzenegger's $15 billion bond plan to help cover a huge state budget deficit.
Instead of showing life-changing jackpots that can exceed $100 million, the new billboards say there were thousands of recent local winners, a reference to scratchers and other games with better odds but smaller payouts.
"(The players) were waiting for the jackpot to get bigger and bigger, and that had a detrimental effect on sales," said Joan Borucki, the lottery director.
The first reaction to Schwarzenegger's bond plan from many legislators: You cannot be serious. There are doubts about whether sluggish lottery sales can be boosted, fear of losing school funds and qualms about pushing gambling.
But the basic idea gained credibility when nonpartisan Legislative Analyst Liz Hill, seeming to hold her nose, signed off on the governor's strategy and suggested a lottery bond of $5.6 billion to balance the budget.
Then Assembly Democrats approved a budget with $15 billion in lottery bonds that would be used to pay off debt instead of creating a reserve as Schwarzenegger had proposed.
"Given the bad choices before us, the governor's lottery plan deserves consideration and improvement, rather than instant dismissal," former Assembly Speaker Fabian Núñez, D-Los Angeles, wrote in a newspaper op-ed piece.
The lottery bonds would reduce the need for painful spending cuts or tax increases - easing the conflict between Democratic and Republican legislators that has left the state with a deficit for seven years.
For the Republican governor who promised to "tear up the credit card," the bonds technically would not be borrowing because they are paid off by lottery ticket sales, not the state's taxpayer-supported general fund, a distinction lost on many.
But is encouraging more gambling a proper way to help balance the budget? Some opponents argue that much of the increased revenue would come from low-income persons, who can least afford losses.
"It's a state-run predatory game that often preys on the most vulnerable," said Fred Jones of the California Coalition Against Gambling Expansion, a faith-based group affiliated with opponents of alcohol abuse.
Borucki, the lottery director, said the view that most lottery players are poor is a myth. Monthly tracking surveys show that ticket buyers mirror the population in gender, age, ethnicity, education, income and employment status.
The lottery surveys don't jibe with other reports, Jones said. And even if the lottery surveys are correct, he said, low-income people "are buying a disproportionate number of tickets compared to their income."
Schwarzenegger argues that the use of gambling funds to aid state programs was endorsed by the public in 1984 when voters approved the lottery, which gives 34 percent of its revenue to education.
Schools are getting about $1 billion a year from the lottery, roughly 1.5 percent of the total education budget. The main sponsor of the lottery initiative, Scientific Games, sells lottery equipment.
Racetrack groups fearing competition ran an opposition campaign that outspent Scientific Games. But Proposition 37 was approved by 58 percent of the voters.
The governor's lottery bond proposal, which would need voter approval in November, could face opposition from two of the state's most politically powerful groups: teachers and gaming tribes.
The California Teachers Association did not support the 1984 initiative and always has had a love-hate relationship with the lottery. The union feared that lottery sales pitches would lead people to believe schools are adequately funded.
"We get that all the time," CTA president David Sanchez said in a recent interview.
Sanchez said the teachers would follow their usual decision-making process if a lottery measure is placed on the ballot. The teachers seem likely to oppose the bonds if schools are not protected.
Legislators have warned that a lottery bond measure could be sunk by opposition from wealthy gaming tribes, who might fear greater competition for the gambling dollar.
The tribes are being assured that a push to increase lottery sales would not include video lottery terminals, which are used by some state lotteries and are said to be much like slot machines.
One of the few comments from tribes is that bonds are a better plan than the governor's original proposal to lease the lottery to a private operator for a large lump sum, perhaps as much as $37 billion.
Presumably, a lottery operated by the state would be more responsive to complaints from tribes. While some states have issued lottery bonds, plans to lease lotteries in other states have stalled.
A big question is whether lottery sales can be doubled to pay off a $15 billion bond. Doubts caused Hill to recommend a $5.6 billion bond.
Schwarzenegger argues that the lottery is underperforming because average per capita sales were $88 in 2006, compared with an average of $189 in the other 40 state lotteries and $225 in the 10 most populous states.
Average per capita lottery sales were $110 in the states west of the Mississippi, where lottery-playing is not a long tradition. An administration official argued that the key comparison is with the 10 big states.
Schwarzenegger's plan is based on boosting lottery sales to the national average, doubling the current revenue and creating a new stream of revenue, $1.2 billion a year, that could be used to pay off the bond.
A report issued last fall by the Milken Institute in Santa Monica said current rules prevent the lottery from increasing payouts, building reserves to invest in new games and more marketing, and using new technology.
Massachusetts has the highest per capita sales, $707, of any state lottery that does not use video lottery terminals, said the report. Its payout rate in prizes is about 70 percent of revenue, compared with 54 percent in California.
"Increasing payouts is a big deal and is probably the one thing that can affect sales the most," said Borucki, the lottery director.
Some of the suggestions for boosting sales: ticket-vending machines that give change and could be placed in stores, pushing tickets by Internet and cell phone, and selling ad space on lottery tickets.
"It's very valuable real estate," Borucki said of the rates that could be charged for placing ads on tickets.
Another hurdle for the governor's bond proposal: major differences with the Assembly Democratic plan.
Schwarzenegger needs $5 billion from the lottery bonds to balance his proposed budget for the new fiscal year that begins July 1. Assembly Democrats need $3.6 billion from the bonds to balance their budget plan. That's not such a big deal.
But the governor wants to use the remainder of the $15 billion to build a reserve. Money would be put into the reserve automatically in good times, which could soften cuts needed when a slowing economy produces less tax revenue. That also would serve as a spending cap - something Democrats oppose.
Instead of a reserve, Assembly Democrats want to use the bulk of the $15 billion to pay off debt run up in recent years, including money owed to schools.
What would happen if voters reject the lottery bonds in November? The governor's backstop is a temporary one-cent increase in the sales tax, opposed by Republican legislators.
The backstop in the Assembly Democratic proposal, still a sketchy outline like the governor's plan, could be a combination of tax increases, spending cuts and short-term loans.
But even if approved by voters in November, some legislators do not think the lottery bonds could be sold in time to provide money before the new fiscal year ends next June.
"We don't think it's workable," the Senate budget committee chairwoman, Denise Ducheny, D-San Diego, said of the plans by the governor and Assembly Democrats to base the new budget on revenue from lottery bonds.
The Schwarzenegger administration cited a bill introduced in February, SB 1679 by Sen. Dean Florez, D-Shafter, as an example of legislative interest in boosting lottery sales to finance bonds.
But Florez had his own view of how lottery bonds should be used. He said it was a kind of "education plus" proposal for a large fund to offer needy students a free college education.
"We wanted to put $15 billion into an endowment fund," Florez said.
Thanks to Hosni for the tip.