NASHVILLE, Tenn. — A day of reckoning is coming for students and parents over Tennessee's lottery scholarships that could result in tightened eligibility, reduced scholarship awards or both.
After more than five years of steadily expanded eligibility and grant amounts, the annual cost of the program is outstripping the net revenue produced by the lottery.
If no action is taken, that funding gap is now expected to overtake the lottery reserves — some $385 million built up in the lottery's booming early years and when only one, two and three classes of college students were covered — by 2013 or 2014.
If lottery proceeds don't increase, the state's only options are to make it more difficult in the future for students to qualify, reduce the amount of the grants, or both. The scholarships now range up to $5,500 per school year — the $4,000 basic HOPE scholarship plus a $1,500 supplement for qualifying students whose household incomes are $36,000 or less.
The 2003 statute that created the lottery and scholarship program require the scholarships to be self sustaining with lottery proceeds, and not tax appropriations.
The State Funding Board received a status report on the scholarship program Friday. Officials said that unless the state legislature wants students to face catastrophic cuts at once, lawmakers should start trimming the program as early as 2010.
"Clearly there is a fiscal hole facing these scholarships," state Finance and Administration Commissioner Dave Goetz said.
He said he believes the General Assembly should begin addressing the problem this coming year.
The state had to dip into the reserve fund by about $11 million on June 30 to close its books on school year 2008-09. Lottery-funded scholarships and other programs are projected to total $287.5 million in the current school year, but net revenues are projected to range from $257 million to $267 million — a shortfall of $20 million to $30 million, according to figures submitted to the Funding Board Friday. Some of that could be offset by interest earnings on the reserves.
By 2013-14, lottery scholarships are expected to reach $388 million while lottery proceeds are projected to range from $257 million to $278 million. The cumulative shortfall by that year could range from $325 million to $402 million.
Compounding the concerns for parents and students are both the sharp decreases in state taxpayer appropriations for higher education and increases in tuition and fees that are ongoing.
Ann Butterworth of the state Comptroller's Office, who presented the fiscal analysis to the Funding Board, said that dipping into the reserves reduces the amount of interest earnings the reserves generate for the program.
The popular HOPE scholarships — $4,000 a year for students who earn at least a 21 ACT score or a 3.0 grade-point average in high school — comprise 90 percent of the costs of the lottery-funded scholarship programs. About 100,000 students are enrolled in higher education this year under some form of lottery-funded assistance.
The analysis prepared by the Tennessee Higher Education Commission says changes in HOPE scholarship expenditures are largely driven by three factors:
The economy generated "significant enrollment increases" in higher education that are expected to be sustained through 2013-14.
Implementation of the Tennessee Diploma Project, a program to make high school studies more rigorous, is expected to increase the overall academic preparation of high school graduates, making more students eligible for HOPE scholarships.
The slight decline in high school graduates expected over the next few years would slightly decrease costs.
Beyond the HOPE grants, there has been rapid growth in two other lottery-funded programs: Technical Skills Grants, which provide up to $2,000 per year to attend Tennessee Technology Centers, and Dual Enrollment Grants, up to $600 per year for high school juniors and seniors to take college classes for credit.