SACRAMENTO, Ca. — Like the lottery games it promises to change, Proposition 1C looks to be a bit of a gamble.
The measure could deliver $5 billion to help close the state's staggering $42 billion budget gap. At the same time, it would ease long-standing rules that some believe have held back the 25-year-old state lottery.
Within a few years, however, Proposition 1C may only make the state's financial problems worse, the nonpartisan Legislative Analyst's Office has warned.
The proposition, one of six budget-related measures on the May 19 ballot, would do away with the lottery's direct link to schools that now receive a set percentage of the proceeds. Instead, the money would go to the state's general fund.
In return, schools would be guaranteed that amount from the general fund, but it would grow at a higher rate over the years.
"In order to come up with a short-term benefit to the general fund without putting a bigger burden on taxpayers, there will be a long-term benefit to education," said Loren Kaye, president of the California Foundation for Commerce and Education, a research group affiliated with the state Chamber of Commerce.
"That's not the worst thing in the world, to have a long-term benefit to education," Kaye said. "After all, that's what the lottery was designed to do in the first place."
But the proposition has raised other questions about the wisdom of borrowing against the lottery and revamping its games to spur more gambling in a state where the industry ranks a close second to Nevada's.
"We believe it is bad fiscal and public policy," said Janis Hirohama, president of the nonpartisan League of Women Voters, which opposes the measure.
Hirohama said bond financing is appropriate for infrastructure needs but "not to fill part of a budget deficit."
James Butler, executive director of the California Coalition Against Gambling Expansion, said the proposition's success depends on more gambling.
"When gambling expands, so do the problems associated with it, including crime, homelessness, unemployment," Butler said.
California voters approved the lottery in a 1984 initiative that set strict bounds for its proceeds - at least 50 percent must be paid back in prizes, 34 percent must go to schools and no more than 16 percent may be spent for operations and overhead.
But lottery sales have been sliding since peaking at $3.6 billion three years ago. Amid the slump, the Schwarzenegger administration began exploring proposals to privatize the operation.
That evolved into Proposition 1C, which would securitize the lottery's profits, and use that money to pay off bonds, at least $5 billion initially with the option to sell more in later years.
Gov. Arnold Schwarzenegger's aides said the $5 billion was necessary to strike a budget compromise that included $15 billion in cuts and $12.5 billion in tax increases.
"This is the lowest-cost capital that the Legislature and the governor could come up with to close that last $5 billion hole," said David Crane, a senior adviser to the governor. "But it only happens in the context of budget reform, which is the key."
Crane was alluding to Proposition 1A, the centerpiece of the ballot package. Proposition 1A would establish spending controls and a reserve fund, both designed to even out fluctuations in the state's finances. It would also extend the temporary tax increases in the new budget for two years.
Lawmakers will have to revise the budget deal if any of the initiatives fail save one: Proposition 1F, which prohibits legislators from receiving pay raises during deficit years. The revenue in the budget package, to varying degrees, is dependent on the other five measures.
The lottery proposal is modeled after a maneuver involving the state's tobacco settlement payments. Under that arrangement, approved during an earlier budget crisis, the state has collected $6.5 billion in upfront payments while paying off the bonds with more than $450 million a year it receives from tobacco companies.
The lottery bonds would be paid off with the slice of revenue - $1.1 billion in the latest year - that historically has gone to schools. The obligation to education would be transferred to the state's general fund, along with a more aggressive growth rate.
School lottery revenues have fluctuated with the lottery, increasing less than 2 percent per year over the past two decades. Proposition 1C would establish a growth rate pegged to increases in school enrollment and a cost-of-living index. Those combined factors have climbed nearly 6 percent a year over the same period.
"Schools should get more growth and more consistent growth than they do under the current law," said Jason Dickerson, who analyzed the measure for the Legislative Analyst's Office. "And that funding cannot be changed except by going back to the voters."
Proposition 1C would authorize the Legislature, by a two-thirds vote, to make other changes to the lottery's games or operations.
The ballot measure also would trim the amount allocated for administration and other overhead from 16 percent to 13 percent.
With more freedom, lottery officials believe they can energize sales by boosting the level of winnings returned to perhaps 60 percent or more of revenues. The games currently return about 54 percent, Lottery Director Joan Borucki said.
"We estimate that with (higher) prize payouts, sales should be somewhere in the neighborhood of $8 billion in about 10 years," Borucki said. That would be a nearly triple the $3 billion in lottery sales last year.
Based on experience in other states, Dickerson agreed that higher payouts should boost sales, although to a more modest degree. Profits, however, probably would not grow as fast with more spent on prizes.
While the administration has said it plans to secure $5 billion from the lottery deal, Proposition 1C does not limit how much the state may borrow against the lottery in future years.
The $5 billion would cost the state $350 million to $450 million a year in debt-service payments, the legislative analyst estimated. Although potentially higher lottery profits may result, it's doubtful they will be enough to cover the debt and higher payments to schools, Dickerson warned.
That, the analyst concluded, "would likely make it more difficult to balance future state budgets."
To the contrary, Crane believes a more competitive lottery could become a net contributor to the general fund.
"If we can improve it," he said, "we will get more income . . . which will make life much easier for the rest of those programs in the general fund that are always getting cut."