Perhaps no operation of state government has been sized up for reform more in recent years than the California Lottery.

Lease it... sell it... remove the existing restrictions... all have been discussed in hopes of getting higher profits out of a lottery that's more than two decades old and, in the eyes of many, not making as much money as it should.

In two weeks, voters will be asked to approve a relatively mild tweak to the California Lottery, but one worth major bucks to the state budget. This morning on The California Report, we examined the proposal at the heart of Proposition 1C.

(more...)

The first public polls on any ballot measures before election day should usually be taken with a grain of salt; after all, the voters still don't know very much about the proposals, and the election is usually a long ways off.

That's not altogether true in the poll out today.
(more...)

The audio is here:

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.

BUDGET DAY PLUS 47 -- Expect some heated policy talk, sprinkled with shrewd politics and a dash of theatrics as the Assembly convenes this afternoon to debate, and vote, on a new state budget -- the first Sunday session of the lower house in more than five years.

On Saturday afternoon, some of the first specifics were released about the budget to be considered. As has been reported several times in recent days, the budget presented by Democrats... one they say was crafted with an eye toward the budget priorities of Governor Schwarzenegger... is almost certain to fail passage, with Assembly Republicans in no mood to approve the increase in high-earner personal income taxes that the bill contains.

But until some of the budget's specifics were released yesterday (with a news embargo until this morning), we didn't have a clear sense of two key issues -- the "rainy day" reserve fund which appears crucial to ultimately striking a deal, and the Democratic plan for using the California Lottery as a source of future revenue.

First, the reserve fund. Assembly Democrats appear to have adopted most of the suggestions laid out back in February by Legislative Analyst Elizabeth Hill. Those recommendations focus on strengthening the existing reserve fund that was created by 2004's Proposition 58. And they include enlarging the reserve to 10% of general fund revenues, making it ostensibly harder to pull money out of the reserve fund, additional transfers into reserves in better-than-expected years, and specific rules about where any reserve funds above the 10% mark go -- including one-time expenses or even one-time tax cuts.

What's probably most worth noting is how Democrats want those "better than expected" years to play out. Specifically, they want to use revenue estimates contained in the budget bill passed the summer before... also known as revenue forecasts controlled, in part, by the Legislature. That differs from the governor's budget reform plan, which relies on revenue forecasts controlled by his own Department of Finance.

The other significant element of the Assembly Democratic plan is borrowing against future California Lottery revenues, known as securitization. The proposal appears to call for borrowing $10 billion from Wall Street, compared to the governor's $15 billion lottery borrowing plan. It also guarantees public schools would keep getting what they get now from lottery sales.

But perhaps more intriguing: the Democratic plan, like Schwarzenegger's, allows larger jackpots (thus eliminating the 24-year old mandate that 34% of profits go to education)... while rejecting the governor's call for allowing the lottery to offer new games.

While that's likely a concession to those who worry about the social and/or moral implications of a major gambling expansion, it may very well jeopardize the amount of extra profit the lottery can generate -- and therefore, the amount of money Wall Street is willing to lend.

Also worth noting: Assembly Democrats have dropped two of their tax increase plans from a few weeks ago -- the cancellation of expected "indexing" of tax rates for upper and upper-middle income earners (it would have given the state an extra $815 million) and a lowering of the taxpayer credit for having a kid (which would have brought in an extra $215 million).

Expect to hear more about all of this later today, and check back in for some live blogging from the Assembly floor.

BUDGET DAY PLUS 28 -- For more than a year, the California Lottery has been a tempting, and theoretical, treasure chest for lawmakers in search of a government cash infusion.

But there's no guarantee that the treasure chest actually has treasure in it.

In the second day of our in-depth look at the Californa Lottery on The California Report, we took a look at the most recent plan to use lotto cash -- Governor Schwarzenegger's proposal to ask Wall Street investors for a loan to the state, paid back over time with future lottery revenues.

Hear it here:

This is actually the second lottery plan from Schwarzenegger, who last year considered leasing the 23-year-old operation to a private vendor in exchange for upfront cash to help fund his (ultimately ill fated) health care reform plan.

There are two main issues to consider about the lottery bond proposal: what will it take to pay off those bonds? And what are the policy and social implications of a major expansion of the California Lottery?

First, the bonds. Although legislators have voiced skepticism about the plan (more on that in a moment), the governor's budget team has continued its discussions with Wall Street bankers about a bond offering of $15 billion for budgetary needs, with $5 billion to be used this year.

But detailed projections from the Department of Finance reveal a much larger borrowing plan, almost $19.8 billion in total bond borrowing. Part of the extra cost is due to the governor's promise to maintain the lottery's current $1.2 billion contribution to public schools, while hundreds of millions of dollars in fees will be handed over for bankers to carry out the transaction.

Also worth noting: the bonds would not be paid back in full for 36 years, a time frame that appears longer than when the proposal was unveiled in May.

As to what it would take to pay off the bonds... lottery director Joan Borucki sent the governor's budget team a memo last month that outlines some of the ways the California Lottery would grow in order to pay back investors. The document, which has not been widely publicized, gives the most revealing look to date of what kind of lottery expansion and change is being contemplated. Some highlights:

* Lottery sales would have to double in the next five years and triple by 2018.
* 18 million Californians would need to be playing lottery games by 2011, which works out to more than six in every 10 adults.
* The instant winner "Scratchers" games would include $10 tickets by 2010 and $20 tickets by 2012, each offering larger grand prizes.
* More games would offer more winners, and more "second chance" ways to win.
* Parimutuel betting, which was mandated by a 1996 court ruling that banned fixed prizes, would end by next year... thus allowing lottery officials to return to publcizing the exact amount of prizes. And overall, the lottery reform plan calls for much, much more marketing.

The revenue projections for a lottery freed of the restrictions contained in the original 1984 initiative are optimistic. Perhaps too optimistic.

"The lingering uncertainty about what's going to happen to the economy over the next few years affects the ability of the lottery to achieve these optimistic sales growth assumptions," says Jason Dickerson of the Legislative Analyst's Office.

Economic issues aside, let's not forget that gamblers already have a of options in the Golden State, from card rooms to horse tracks to more than 50 Indian casinos. "There's a fierce competition for the entertainment dollar here," says lottery director Borucki.

Even if the assumptions do pan out, there have been concerns raised about the social effects of more people placing more money, and hope, on winning it big. "Lower income individuals spend a disproportionately high percentage of their income compared to higher income individuals on the lottery," says LAO researcher Dickerson.

And if that isn't enough, let's not forget the political hurdles to getting these lottery changes approved. The education community has been concerned, if not officially opposed, to almost every lottery reform plan over the years. While the gambling enterprise brings in less than 2% of education funding, it's been relatively reliable. And perhaps even more telling: lottery cash, unlike most all other education funding, comes without strings attached by Sacramento lawmakers. And according to data provided by the state Department of Education, almost 65% of the lottery money sent to the schools goes to educator salaries.

Word around the Capitol is that squeezing more cash out of the California Lottery is unlikely to be part of this year's plan to bridge the $15 budget gap... but that legislators could consider such a plan for future cash needs.

Of course, any changes must be approved by voters; and in a few short weeks, the last chance to get a lottery proposal on the ballot before June 2010 will have passed by.

BUDGET DAY PLUS 27 -- With this year's budget negotiations continually coming back to some scheme, any scheme it seems, to extract money from the California Lottery, some context seems to be in order.

On this morning's edition of The California Report, we begin a two day examination of the Golden State's 23-year-old lottery... created by voter initiative and sold as a great way to help fund public education. But the lottery has never proved to be the goose that laid the golden egg for the schools; while last year it sent some $1.3 billion dollars to K-12 and higher education, that's pennies on the dollar for what it takes to educate California's kids.

In the meantime, the lottery has had dramatic turnover in leadership, has struggled to market itself, and over the past year has been called everything short of a failure by elected officials -- most notably, Governor Schwarzenegger.

Trouble is, almost every expert agrees that the lottery's real problems stem from the initiative approved by voters in 1984... an initiative that created the most regimented, and restrictive, revenue distribution system of any lottery in the nation.

The initiative mandates that 34% of all revenues must go to education. That guarantee sounds good, until you consider that it automatically also caps how much money can go back into prizes and jackpots. "The more that goes to prizes, the more that people buy lottery tickets," says Jason Dickerson of the Legislative Analyst's Office.

And therefore, the more money that would actually end up flowing into the schools.

"If all of the restrictions were gone today," says lottery director Joan Borucki, "in ten years from today I would [be able to] more than double the amount going to the good cause."

Other restrictions hindering the lottery's operations include legal rulings that have decreed new technology and guaranteed prize amounts for some games to be off limits; both limitations rarely -- if at all -- exist with any other lottery in the United States.

The governor's attempt to hike the lottery's profits, either through leasing to a private entity or this year's push to borrow against future lottery revenues, requires these restrictions to be lifted. And analysts have concluded that means going back to the voters.

“It's an asset that is underperforming," said Schwarzenegger at the news conference unveiling his revised budget in May. "And I think that as governor, or I think the legislators also, we have a responsibility to make sure that government performs at 100 percent.”

But those kinds of changes are frought with pitfalls, both political hurdles and larger, societal questions about government's role in encouraging more and more legalized gambling. Those issues are examined in tomorrow morning's report.

Audio from today's broadcast can be heard below.

BUDGET DAY PLUS 16 -- Today's confab between legislative leaders and Governor Schwarzenegger certainly didn't resolve the budget impasse, but it did feature some serious talk on a familiar subject: the California Lottery.

The roughly two hour meeting of the "Big Five" came as both houses of the Legislature sit in recess with rank-and-file members on what many critics have called an undeserved vacation. And while leaders exiting the meeting indicated there was a lot of broad discussion on issues, all confirmed that the governor's team brought in analysts to discuss ways to squeeze money out of the lottery.

You'll remember that Schwarzenegger placed a plan on the table several months ago to balance the budget, in part, through the sale $15 billion in bonds repaid with future lottery revenues. The specific pitch never gained much traction at the state Capitol, with Democrats saying it was unrealistic to expect the money to show up in time to help this year's dilemma... and Republicans decrying the lottery proposal's backup plan -- a sales tax increase.

A phalanx of financial advisers, along with the governor's economic guru, David Crane, were seen exiting the meeting just after noontime. And yet Democrats still said the issue was a possible source of cash for the future... but not now.

"I think it's pretty conclusive that it's a not a budget solution for this year," said Senate President pro Tem Don Perata.

Of course, the voters haven't seemed hot on the idea, either.

Republicans came out of the meeting saying they remain focused on some kind of budget reform proposal, still a tough sell to Democrats.

And as for what happens next... don't expect full legislative action soon. Almost two weeks ago, Democratic leaders vowed to work towards a full budget vote in both chambers by next week. Will that still happen?

"I don't believe so," said Assembly Speaker Karen Bass.

With a stroke of the pen, Governor Schwarzenegger has added a twelfth proposal to the November statewide ballot... a big ballot that may still grow bigger.

The governor placed a $900 million bond measure on the ballot to provide low-interest home loans to returning veterans of current and recent wars. And in swift order, Secretary of State Debra Bowen then designated the vets bond as Proposition 12.

The backers of Prop 12 say the bonds will be repaid, over time, through loan payments made by veterans. The measure sailed through the Legislature with not a single vote in opposition, and quickly made its way to Schwarzenegger's signing desk in a ceremony in Sacramento this morning.

So that's 12 measures in all, and more are in the hopper. Remember there's a possible water bond (which was the subject of new discussions last week), a budget reform proposal pitched by the governor (with a separate idea on the issue floated by GOP legislators), and a possible reform of the 24-year-old lottery initiative to raise cash for state budget needs.

That would be 15. And even more new voter decisions were mentioned this afternoon by Senate GOP Leader Dave Cogdill in his appearance before the Sacramento Press Club. Cogdill said Republicans may push for balancing the current state budget by borrowing or using money currently earmarked for other voter-approved initiatives.

Such a plan would, you guessed it, require a vote of the people. If all of those "tweaks" could be placed in one proposal, that would be 16. If not, it could mean as many as 18 ballot measures. Wow.

Direct democracy is alive and well in California.

With the future of the California Lottery still under discussion in this dismal budget season, one state legislator is pitching a way to increase lottery sales: gas giveaways.

Sen. Dean Florez (D-Shafter) said today that he'd like to see lottery officials take a page from the playbook of other states, where lottery prizes now include free gas cards.

"As we look for ways to think 'outside the box' to make the lottery attractive to new players," Florez wrote in a letter to California Lottery director Joan Borucki, "this is one idea that should be given serious and prompt consideration."

Florez was apparently inspired by a story in today's edition of The New York Times chronicling a free gas giveway -- for life-- now being offered as a prize by the Florida Lottery. At least four other states are also now dangling gas giveaways as prizes for lottery winners.