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.

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.