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Arizona legislators may borrow against future lottery revenue

Nov 23, 2009, 10:32 am

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Arizona LotteryArizona Lottery: Arizona legislators may borrow against future lottery revenue

Voters must extend lottery beyond 2012

PHOENIX, Az. — State lawmakers already are eyeing another special session on the budget next month, including a proposal to ask voters to extend the Arizona Lottery.

The plan comes even though the Republican-controlled Legislature has yet to give final approval to plans to cut about $300 million in state aid to education and welfare-agency funds.

That effort stalled Thursday when two GOP lawmakers refused to go along with a piece of the package to let state agencies raise their fees to make up for the loss of tax dollars. Legislative leaders will try again Monday.

House Speaker Kirk Adams, R-Mesa, said he believes further spending cuts will be necessary. But Adams said lawmakers also will have to look at not only revenue increases, such as Gov. Jan Brewer's proposed temporary sales-tax hike, but also one-time sources of cash.

Translation: borrowing.

Technically, Arizona is constitutionally prohibited from long-term borrowing. So what is being considered is called "securitization."

Put simply, the state would borrow money with the promise to repay it from a specific source, in this case, future lottery proceeds. Because only the lottery proceeds would be pledged, the plan is constitutional.

The idea was first floated by Janet Napolitano when she was governor. And Brewer herself included a $450 million proposal in her own suggestion for balancing the budget.

But there's a hitch: The lottery was created by an act of the voters in 1980. And it was reauthorized in 2002, but only for a decade.

That means it goes away in 2012 without further action.

Jeff Hatch-Miller, director of the Arizona Lottery, said one school of thought says that the Legislature could extend the life of the lottery itself, without a public vote, based on the premise that the intent of the 10-year "sunset" approved in 2002 was solely to review the operation of the agency, not to have it actually go away.

But Hatch-Miller said that could raise legal questions.

"The simplest and easiest legal way to do it is to do it through the voters," he said. Hatch-Miller said he believes the measure would easily gain reauthorization, pointing out that the 2002 measure was approved by a margin of more than 3-1.

Rep. John Kavanagh, R-Fountain Hills, said if the state wants to borrow against lottery proceeds, would-be lenders need to know upfront that the agency will be there for the life of the bond, whether that is 20 or 30 years. So he wants the issue considered at a special election in March, rather than waiting until the regular election in November.

That, however, probably would not be the only issue on the ballot. Kavanagh, who chairs the House Appropriations Committee, said that would also be voters' chance to decide on Brewer's proposal for a 1-cent-per-dollar increase in the state sales tax rate, to 6.6 percent.

By itself, that would not bring in a lot of money, perhaps only $80 million a month. But it would open the door to also "securitizing" the proceeds over the tax increase's three-year life, getting the money upfront.

Also likely to go on the ballot at that time is a proposal to alter a 1998 voter-approved constitutional provision prohibiting legislators from altering or eliminating any program that the voters enacted. Kavanagh said lawmakers should have some flexibility to divert funds to more necessary programs in times of financial emergency.

How much immediate cash selling off future lottery proceeds could bring depends on a number of factors.

One, obviously, is whether the pledge is for 20 or 30 years of proceeds. Beyond that is the question of how much lawmakers are willing to commit the state to repay each year.

Hatch-Miller said that in the last fiscal year, said the lottery contributed $43.2 million to the state treasury. But he said that, to be on the safe side and account for unforeseen revenue drops, the state should pledge no more than $31 million a year.

That leads to the other factor: How much in interest will lenders want?

Rep. Jim Weiers, R-Phoenix, said that if the state were going to borrow against the lottery, it probably should have done that years ago when it was a "seller's market." Now, he said, with lots of states looking for cash, it may be harder to get a favorable interest rate.

All the plans for a December special session presume lawmakers can wrap up the current one. Both the House and the Senate have given preliminary approval to the package of spending cuts and fee-increase authorization.

But with Democrats unwilling to vote for the cuts, Senate President Bob Burns, R-Peoria, needs 16 of his 18 GOP senators to support the measure for final approval, a target he was unable to hit on Thursday.

Arizona Daily Star

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