Budget Jackpot?

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In next year’s special election, voters will be ask to change… and essentially sever… the almost 24-year relationship between the California Lottery and public education. They’ll also be asked to approve a borrowing plan related to the lottery with no specific limits.

On this morning's edition of The California Report, we examined the measure being sent to voters next year to "securitize" future profits from the long struggling California Lottery, a plan now estimated to provide $10 billion to the state budget over the next two years.

Securitization is, for all intents and purposes, borrowing… in that it asks for money now, to be paid back over time. In this case, Wall Street investors would receive their money back – with interest – over 30 years from lottery revenues.

The proposal that will appear on a special election ballot (June 2, 2009 as it now appears) will ask voters to remove K-14 education from its historic place as the recipient of lottery revenues. Instead, an amount roughly equal to current lottery education dollars ($1.2 billion) will be built in to the Proposition 98 school funding guarantee. The existing lottery revenues, says Governor Schwarzenegger's budget team, will then be sent to the state's General Fund to cover that extra Prop 98 funding.

But the interesting changes lie elsewhere in the deal.

For starters, the ballot measure voters will consider removes all limits on how much revenue can be pushed back into prizes, thus ensuring the biggest jackpots in California Lottery history. Bigger jackpots, as other lotteries know, bring more revenues… and the lottery's new focus will be almost exclusively on bringing in more money.

That's because those extra revenues will go to investors who loaned the state money. And while the investors won't be holding debt backed by the "full faith and credit" of the state (as in general obligation bonds), it will no doubt be in the state's interest to have those payments made, with interest. Might that put the state's General Fund on the line if everything goes bust? Perhaps.

The real question, says Jason Dickerson of the Legislative Analyst’s Office, is how much will Wall Street lend the state… and at what interest rate? Dickerson says it's likely that lottery notes will require a higher interest rate, simply because they’re not backed up – technically – by the state treasury.

"This is a good investment," said Schwarzenegger's finance director, Mike Genest, in a budget briefing with reporters yesterday. He rejects any concern that the current volatility on Wall Street might affect the appetite for lottery debt.

The existing plan is to borrow $5 billion for the 2009-2010 budget year, and another $5 billion the year after that. But is that the end of it?

Maybe. However, our reporting discovered that neither the actual constitutional amendment to be approved by voters nor the accompanying bills signed by the governor Tuesday mention that $10 billion amount.

"The measure going before the voters would allow unlimited borrowing in the future," says Dickerson. Finance director Genest says that's an unrealistic assumption, because the financial markets have only a limited appetite for such a product. However, he conceded on Tuesday that there technically are no limits to how many times future lawmakers could go back to Wall Street and ask for more. Of course, that would require even more revenue from the lottery.

The other question that voters probably won't know the answer to: how much more money can be squeezed out of the lottery? The governor’s original plan for allowing new games to be offered was rejected by the Legislature; the proposal that will appear on the ballot only removes the specifics on how lottery revenues must be divvied up.

Schwarzenegger bragged earlier this year about doubling lottery profits; expect such promises to get some serious scrutiny should voters approve what might amount to a serious expansion of state government’s gambling enterprise.

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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