Tennessee's lottery could be short of money to fund college scholarships within a couple of years if current projections of lottery revenue are correct, an analysis by the state treasurer has found.
By the end of the 2006 fiscal year, the scholarship fund will be $13 million in the red, and the shortfall will be larger in subsequent years, the treasurer's analysis shows.
This means legislators may have to cut the amount given for scholarships or tighten eligibility so fewer students receive them, says state Sen. Steve Cohen, D-Memphis, who as sponsor of the lottery prefers the latter.
The problem was that no one fully understood how much all the scholarships would cost when lawmakers loosened eligibility standards last year, Cohen said.
Under the standards initially proposed, high school seniors would have had to earn a 3.0 GPA and a score of 19 on the ACT standardized test to receive a HOPE scholarship.
At the last minute, lawmakers decided that students could qualify by meeting either of the two criteria, adding about $56 million a year to the cost of the scholarship program, Cohen said.
The four-year projections are based on lottery President Rebecca Paul's estimate that the lottery will turn over $199.7 million to the scholarship fund next year.
Some question whether her estimate is realistic, but it is based on gross sales that are in line with what the legislature's Fiscal Review office projected last year.
Lawmakers are poised this month to add another $18 million to the cost of the scholarship program by lowering requirements for home-schoolers and students on technical tracks.
"We're fiddling while Rome burns," Cohen said. "We need to reform the program, but I've seen no political courage to act."
Cohen wants the ACT requirement raised to 23 or dropped, requiring all students to have a 3.0 GPA. That could head off a potential shortfall, as well as provide money for pre-kindergarten and after-school programs, which are secondary priorities in the lottery program, he said.
Brian Noland, associate executive director of the Tennessee Higher Education Commission, agreed that changes may be needed.
"At some point in time, we're going to do exactly what other states with lotteries have done Florida, Georgia and make sure the scholarship program is serving its intended purpose, which could mean looking at eligibility standards," he said.
THEC, which oversees the state's colleges and universities, provided estimates of how much scholarships would cost through 2008, based on the legislature's criteria.
THEC estimates 65,000 scholarships, at a cost of $176.5 million, will be awarded this fall.
The lottery will have more than enough money, about $286 million, to cover the first full year's cost.
But the analysis by state Treasurer Dale Sims shows the scholarship fund facing a shortfall in the 2006, 2007 and 2008 fiscal years.
Steve Adams, a former state treasurer and now the lottery's chief administrative officer, said he expected the lottery to be able to fund all the scholarships.
He views the projected shortfall as little more than a cash-flow problem that can be solved.
Money transfers to the Tennessee Student Assistance Corp., the agency that will distribute lottery scholarships, are to be made in August and December, he said.
Lottery transfers to the scholarship account are made quarterly. This means there will be some times when the lottery won't have enough cash on hand to make the payment when it's due, but will have it later, Adams said.
In December 2007, for instance, Tennessee universities should be paid $139.4 million in scholarship funds. The lottery won't have the money then. But it will have it by the following July, according to the treasurer's analysis.
"That can be resolved easily," Paul said. "I don't know how. We're looking at it."
Paul, considered tops in the industry with more than 18 years of experience, said she did not fear that scholarships would not be funded.
"The revenue estimates are extremely conservative. I don't think they know what the actual costs of scholarships will be, nor do they know what our sales and returns will be," Paul said.
If you look at any other lottery in the country, she said, revenue projections have always been lower than the amount the lottery actually made.
For instance, the Georgia lottery in its first year made $362 million for its education fund, far higher than the projection of about $128 million, she said. Paul started the Georgia lottery and left after 10 years to come to Tennessee.
Paul's first-year Tennessee estimates are based on the first two months and 10 days of lottery sales. She believes that estimate is sound, if conservative.
But using that estimate to "project out five years from now is not a very scientific projection," she said.
Sims, too, cautioned that the four-year projections are highly speculative, saying the projected 10% annual growth rate that he used is not scientifically based. It could be high, it could be low, he said.
In South Carolina, officials expect proceeds to grow about 32% in a lottery's second full year of operation. However, Louisiana's lottery made less in its second full year.
"I think people can look at this and say if the numbers work out this way, adjustments need to be made," Sims said.