BILL ANALYSIS Bill No: AB 142 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Roderick D. Wright, Chair 2009-2010 Regular Session Staff Analysis AB 142 Author: Hayashi As Amended: February 1, 2010 Hearing Date: February 23, 2010 Consultant: Chris Lindstrom SUBJECT California State Lottery DESCRIPTION AB 142, an urgency measure, modifies the allocation formula of the California State Lottery Act (Lottery Act or Act) of 1984. Repeals the modifications to the allocation formula if it is determined by the California State Controller that the amount of revenues allocated to the benefit of public education by the California State Lottery (Lottery) is less than what would have been allocated if the law were not changed, as specified. Specifically, AB 142: 1)Amends Section 8880.4 of the Government Code to require the total revenues of the lottery to be allotted so as to maximize the amount of funding allocated to public education, as follows: a) Not less than 87% (an increase of 3% from current law) of the amount of the total revenues shall be returned to the public as follows: i) Not less than 50% of the total revenues shall be returned to the public in the form of prizes, as determined by the Commission. AB 142 (Hayashi) continued Page 2 Repeals the requirement that a fixed 50% of the total annual revenues shall to be returned to the public in prizes. ii) The percentage of the total revenues to be allocated for public education shall be established by the Commission at a level designed to maximize the total net revenues for public education. Repeals the requirement that at least 34% of the total annual revenues are to be allocated to the benefit of public education. b) No more than 13% (a decrease of 3% from current law) of the total revenues shall be allocated for the payment of expenses of the Lottery. 2)Adds Section 8880.4.5. to require: a) The Lottery, following the end of each full fiscal year, to calculate and report to the Controller and to the Legislature the amount of total net revenues allocated to the benefit of public education from the California State Lottery Education Fund for that fiscal year. b) The Controller, no later than September 1 of each of the first five full fiscal years in which the changes by this bill are in effect, to determine if either of the following have occurred: i) The total net revenues allocated to the benefit of public education by the Lottery are less than the total net revenues allocated to the benefit of public education by the Lottery in the last full fiscal year prior to enactment of this bill. ii) The annual average of total net revenues allocated to the benefit of public education from the Lottery after enactment of this bill is less than the total net revenues allocated to the benefit of public education by the Lottery in the last full fiscal year prior to enactment of this bill, adjusted for an annual growth rate of 1.8 percent or the actual growth rate of lottery AB 142 (Hayashi) continued Page 3 revenues since enactment of the bill, whichever is greater. c) If both 2(b)(i) and 2(b)(ii) occur within the first five full fiscal years in which the changes by this bill are in effect, then: i) The Controller shall notify the Legislature and Governor of his or her determination and report his or her findings on the Controller's Internet Web site. ii) The changes to the Lottery Act made by this bill shall become inoperative and the language in the Act as it existed immediately prior to enactment of the bill shall become operative. 3)Requires the Controller, at the end of the first five full fiscal years following enactment of this measure, to convene a lottery review group to report to the Legislature, no later than December 31 following the final fiscal year, on whether the amendments made by this measure have furthered the purposes of the Lottery Act, as intended. 4)States that the bill addresses the fiscal emergency declared by the Governor by proclamation issued on January 8, 2010, pursuant to the California Constitution. 5)Makes other technical and conforming changes. 6)Declares that the bill furthers the purpose of the Act. 7)Requires a 2/3 vote of the Legislature as an amendment of the Act. 8)Declares that the bill, if enacted, is to take effect immediately as an urgency statute. EXISTING LAW The California State Lottery Act of 1984, enacted by initiative, authorizes a California State Lottery and provides for its operation and administration by the California State Lottery Commission and the Director of the AB 142 (Hayashi) continued Page 4 California State Lottery, with certain limitations. Existing law requires that not less than 84% of the total annual revenues from the sale of state lottery tickets or shares be returned to the public in the form of prizes and net revenues to benefit public education, and that no more than 16% of those revenues be used for expenses of the lottery. Existing law requires that all unclaimed prize money revert to the benefit of public education, and that all of the interest earned upon funds held in the State Lottery Fund be allocated to the benefit of public education. Existing law requires that 50% of the total annual lottery revenues be returned to the public in the form of prizes, and that 34% of those revenues be used to benefit public education. Existing law provides, beginning in the 1998-99 fiscal year, 50 percent of any increase above the amount allocated to education for the 1997-98 fiscal year shall be allocated to school districts and community college districts for the purchase of instructional materials, as specified. Existing law requires that, to the extent that expenses of the lottery are less than 16% of the total annual revenues, any surplus funds be allocated to the benefit of public education. The California State Lottery Act of 1984, an initiative measure, specifies that none of its provisions may be changed except to further its purpose by a bill passed by a 2/3 vote of each house of the Legislature and signed by the Governor. The California Constitution authorizes the Governor to declare a fiscal emergency and to call the Legislature into special session for that purpose. The Governor issued a proclamation declaring a fiscal emergency, and calling a special session for this purpose, on January 8, 2010. BACKGROUND Purpose of the bill. According to the author's office, "AB 142 seeks to increase the amount of funding education AB 142 (Hayashi) continued Page 5 receives from the California State Lottery. By making minor changes to the lottery act's funding formula, the lottery commission will have the opportunity to increase the financial support to California's schools." Background. In 1984, California voters passed Proposition 37 and created the California State Lottery. The purpose of the Lottery is to provide supplemental funding for the benefit of public education. The Lottery Act provides that the net revenues of the Lottery shall not be used as substitute funds, but rather shall supplement the total amount of money allocated for public education in California. In the 25 years since sales began in October 1985 through June 30, 2009, the California Lottery has raised over $23 billion in supplemental funding for public education. In addition, since 1984, the Lottery's retail partners throughout the state have earned over $4 billion in retail commissions and/or compensation for the sale of lottery products. Modernization of the Lottery and Securitization of bonds with Lottery revenues. After a record breaking prolonged budget impasse in 2008, the Legislature enacted, among other things, two measures and a constitutional amendment that would allow for the modernization of the Lottery and the use of Lottery revenues to securitize (debt-service) the sale of bonds, upon voter approval. The Lottery package appeared on the May 2009 election as Proposition 1C. If approved by the voters, Proposition 1C would have provided an estimated $5 billion in revenues to the state. The revenues would have been realized from increased sales as a result of the Lottery modernization and the ultimate sale and debt-servicing of bonds from proceeds realized from the modernized Lottery. The modernization provisions would have modified the distribution percentages of total revenues of the Lottery, allowed the Lottery Commission to set prize payout rates, modified the administrative expenses of the Lottery (which are reduced to 13% from 16% of total revenues), allocated $1 million to the Office of Pathological and Problem Gambling within the Department of Alcohol and Drug Programs, and, generally, make other conforming changes. Education funding would have no longer been paid from Lottery revenues, rather would have been paid from the General Fund. Education would have been guaranteed at least $1.1 billion, adjusted annually for AB 142 (Hayashi) continued Page 6 cost-of-living and student growth adjustments. The ballot measure was not approved by the voters. According to an exit poll survey conducted by Voter Consumer Research after the May 2009 election in which Proposition 1C was considered, 61% of the voters support "modernizing the lottery to improve its performance with increased payouts, improved marketing and effective management." However, when the "$5 billion of borrowing from future lottery profits" and "debt-service payments on this borrowing" elements of Proposition 1C were mentioned, support dropped to just 35 percent in the same survey. Previous proposals by the Governor to sell or lease the Lottery. In early May 2007, Governor Schwarzenegger publicly stated that the Lottery is an underperforming asset and is not run in the most efficient way. He also indicated that the Department of Finance had received proposals from investment banking firms identifying potential benefits associated with leasing the Lottery to a private entity. Investment banking firm proposals for leasing the Lottery have ranged from a conservative $8 billion upfront lump-sum payment to a very aggressive $37 billion upfront lump-sum payment. Initially, the Schwarzenegger Administration believed that leasing the Lottery could generate sufficient money to maintain the amount of funding generated for the benefit of education, pay off the Economic Recovery Bonds, fund new capital outlay projects, and address many other options. Later in the year, the Governor proposed privatizing the Lottery to help finance his plan to overhaul the state's health care system. Under the Governor's latter proposal, the Lottery would no longer provide monies to education - the state would replace that funding with money from the General Fund. Staff comments. Do the changes proposed by the bill need voter approval for them to go into effect? Numerous opinions have been rendered by the Legislative Counsel, attorneys representing the Lottery Commission and interest groups as to whether voter approval is required for certain modifications to the Lottery Act to go into effect. In particular, attorneys have opined on whether the changes that would modify the distribution percentages of the total revenues for prize payouts and education need to go before AB 142 (Hayashi) continued Page 7 the voters. Legislative Counsel has long held the opinion that any changes to the Lottery Act that divert money from education need to go back to the voters for approval. It is argued by the proponents of this bill, and using examples of other state lotteries from around the country, that the proposed changes will increase the amount of money allocated to education by the Lottery. Additionally, the Lottery Commission, among others, have maintained that Section 5 of the Lottery Act allows the Legislature and Governor to change the Act's provisions in order to further the purpose of the Act, which is, to provide more money for education. The Lottery Commission and others have sited that the Act has been modified more than 40 times statutorily and holds that changes to all of the Act's provisions by the Legislature and Governor were expressly authorized by the voters, provided such changes further the purpose of the Act. PRIOR/RELATED LEGISLATION SB 570 (Maldonado), 2009-2010 Legislative Session . Would have instituted a number of changes to reform the Lottery Act. Generally, the changes would have: (1) modified the definition as to what constitutes total revenues, (2) modified the distribution percentages of total revenues, (3) enhanced the authority of the Lottery Commission to establish the percentage of total revenues that will be allocated for prizes and to education, (4) authorized the allocation of $1 million a year to the Office of Problem Gambling within the State Department of Alcohol and Drug Programs for problem gambling awareness and treatment programs, (5) modified the percentage of total revenue allocated for the expenses of the Lottery, (6) enhanced the authority of the Director of the Lottery, (7) modified the Lottery's procurement and contracting authority to allow for the award of contracts to the best (not lowest and best) proposal, and, increases the noncompetitive bid contract threshold from $100,000 to $500,000, and, (8) provided that the provisions of the Lottery Act will control in the event that there are any conflicts between the provisions of the Lottery Act and any other provision of law. (Set but never heard in Senate Government Organization. Died in Senate) AB 1654 (Budget), Chapter 764, Statutes of 2008 . Would AB 142 (Hayashi) continued Page 8 have implemented a number of changes to the Lottery Act to "modernize" the Lottery if the voters would have approved Proposition 1C (which was placed on the ballot by SCA 12 (Resolution Chapter 143 of 2008) in May 2009. (The voters did not approve Proposition 1C) SB 1679 (Florez), 2007-2008 Legislative Session . Would have made a number of changes to enhance the performance of the Lottery. (Never heard in the Senate) SB 1011 (Florez), 2006-2007 Legislative Session . Would have required, among other things, that at least 50 percent of multistate lottery revenues to be allocated to the public in the form of prizes, at least 42 percent must benefit public education, and no more than eight percent to be allocated for lottery expenses. (Died on the Assembly Floor) SB 329 (Perata), 2005-2006 Legislative Session . Would have increased the percentage of lottery revenue allocated to prizes from 50 percent to no more than 60 percent and decreased the percentage of revenue allocated to public education from 34 percent to at least 26 percent. Would have decreased the amount of revenue allocated to the payment of lottery expenses from 16 percent to 14 percent. Would have required the Lottery Commission to guarantee that the contribution to education per year will not fall below the level of funds allocated to education for the 2002-03 fiscal year ($1.019 billion). Would have sunset on January 1, 2012. (Died on the Senate Floor) AB 2938 (Plescia), 2004-2005 Legislative Session . Would have increased the percentage of lottery revenue allocated to prizes from 50 percent to no more than 62 percent. Would have decreased the percentage of revenue allocated to public education from 34 percent to at least 25 percent. Would have decreased the amount of revenue allocated to the payment of lottery expenses from 16 percent to 13 percent. Would have required the Lottery Commission to guarantee that the contribution to education per year not fall below the level allocated for the 2002-03 fiscal year ($1.019 billion). Would have sunset on January 1, 2012. (Never heard in the Assembly) SB 930 (Vincent), 2001-2002 Legislative Session . Would have authorized the California Lottery to, among other AB 142 (Hayashi) continued Page 9 things, sell lottery tickets using an electronic or electromechanical device that also serves a separate function that could involve dispensing cash or things of value as long as that function was independent of the lottery ticket dispensing function. (Died on the Senate Floor) SB 2053 (Governmental Organization), Chapter 509, Statutes of 2000 . Requires the competitive bidding standards, procedures, and rules contained in the Lottery Act that apply to procurements or general contracts of more than $100,000 to also apply to subcontracts involving an expenditure of more than $100,000. AB 1453 (Cardenas), Chapter 800, Statutes of 1998 . Provides that 50% of any increase beyond the 34% of Lottery revenues as calculated for the 1997/98 fiscal year, and currently given to K-12 school districts and community college districts, will be allocated to the schools for the sole purchase of instructional materials. Provides that its provisions take effect only upon approval by the voters. The Cardenas Textbook Act of 2000 (Proposition 20) was approved by the voters on March 7, 2000. AB 3032 (V. Brown), Chapter 581, Statutes of 1994 . Amends the Lottery Act to make the Department of Mental Health eligible for lottery payments for clients enrolled in state hospital education programs. AB 2425 (Baca), Chapter 1236, Statutes of 1994 . Requires all interest earned upon funds held in the State Lottery Fund to be allocated to public education. The interest is in addition to the 34% of lottery revenues otherwise required to go to public education and are not to supplant Proposition 98 funds or funds committed for child development programs. AB 3824 (Floyd), Chapter 500, Statutes of 1992 . Deletes the requirement that 50% of the projected revenue for each lottery game be apportioned for payment of prizes, and instead, provides that 50% of the projected revenues for prizes be computed on a year-round basis. SB 312 (Dills), Chapter 56, Statutes of 1991 . Codifies existing Lottery Commission policy of reverting unclaimed prizes from all "on-line" games, including "lotto," AB 142 (Hayashi) continued Page 10 "decco," and "topper," to the Lottery Education Fund. SB 906 (Dills), Chapter 917, Statutes of 1989 . Among other things, requires unclaimed Lotto winnings to revert back for support of education. Provides that the Lottery Commission, upon a finding that it will generate more net revenue for education may, as a valid promotional expense, supplement the prize pool. SB 1327 (Eastin), Chapter 425, Statutes of 1988 . Provide that payments from the Lottery also be made to the Department of Developmental Services on the basis of average daily attendance (ADA) for clients with developmental or mental disabilities enrolled in hospital or developmental center education programs. SB 116 (Dills), Chapter 426, Statutes of 1987 . Requires the State Lottery to adopt and publish competitive bidding procedures for the award of procurements or contracts which involve expenditures in excess of $100,000. The bill also requires the CSL director to determine whether goods and services subject to these bidding procedures are available through the Department of General Services. AB 3145 (Vasconcellos), Chapter 1362, Statutes of 1986 . Requires the Controller to make quarterly distributions of funds from the California State Lottery Education Fund to the Department of the Youth Authority. In addition, the bill requires the Department of the Youth Authority, through January 1, 1990, to implement a model system of employment preparation and placement services for youthful offenders. SB 333 (Dills), Chapter 1517, Statutes of 1985 . Among other things, adds Hastings College of Law and the California Maritime Academy as recipients of lottery funds. SUPPORT : Association for California State Supervisors California Retailers Association GTECH Service Employees International Union Superintendent of Public Instruction Jack O'Connell Numerous retailers and individuals AB 142 (Hayashi) continued Page 11 OPPOSE : None registered. FISCAL COMMITTEE: Senate Appropriations Committee **********