BILL ANALYSIS AB 142 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 142 (Hayashi) As Amended March 11, 2010 2/3 vote. Urgency ---------------------------------------------------------------------- |ASSEMBLY: |75-0 |(April 20, |SENATE: |32-0 |(March 22, 2010) | | | |2009) | | | | ---------------------------------------------------------------------- (vote not relevant) ------------------------------------------------------------------------ |COMMITTEE VOTE: |18-0 |(March 23, 2010) |RECOMMENDATION: |concur | | | | | | | ------------------------------------------------------------------------ Original Committee Reference: JUD. SUMMARY : Modifies the allocation formula of the California State Lottery Act (Lottery Act or Act) of 1984, also known as Proposition 37. Repeals the modifications to the allocation formula if it is determined by the California State Controller (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. The Senate amendments delete the Assembly version of this bill, and instead: 1)Amend Government Code Section 8880.4 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. Repeals the requirement that a fixed 50% of the total annual revenues shall to be returned to the public in prizes; and, AB 142 Page 2 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)Add Government Code Section 8880.4.5. to require: a) The Lottery, following the end of each full fiscal year (FY), 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 FY; b) The Controller, no later than September 1 of each of the first five full FYs 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 FY prior to enactment of this bill; or, 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 FY prior to enactment of this bill, adjusted for an annual growth rate of 1.8% or the actual growth rate of lottery 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 FYs 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; and, AB 142 Page 3 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)Require the Controller, at the end of the first five full FYs following enactment of this measure, to convene a lottery review group to report to the Legislature, no later than December 31 following the final FY, on whether the amendments made by this measure have furthered the purposes of the Lottery Act, as intended. 4)State findings and declarations that this bill addresses the fiscal emergency declared by the Governor by proclamation issued on January 8, 2010, pursuant to the California Constitution. 5)Make other technical and conforming changes. 6)Declare that this bill furthers the purpose of the Act. 7)Add an urgency clause, allowing this bill to take effect immediately upon enactment. EXISTING LAW : 1)Authorizes, through the California State Lottery Act of 1984, enacted by initiative, a California State Lottery and provides for its operation and administration by the California State Lottery Commission and the Director of the Lottery, with certain limitations. 2)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. 3)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. 4)Requires that 50% of the total annual lottery revenues be returned to the public in the form of prizes, and that 34% of AB 142 Page 4 those revenues be used to benefit public education. 5)Provides, beginning in FY 1998-99, 50% of any increase above the amount allocated to education for FY 1997-98 shall be allocated to school districts and community college districts for the purchase of instructional materials, as specified. 6)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. 7)Specifies, through the California State Lottery Act of 1984, enacted by initiative, 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. 8)Authorizes, through the California Constitution, 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. AS PASSED BY THE ASSEMBLY , this bill required a health studio that is available for use by its members for 24 hours per day, but is not staffed during that entire period, to meet specified requirements, including, but not limited to, providing live video surveillance, of a health studio during times when no trained employees are on the premises, and requiring members, during times when the health studio is not staffed with a trained employee, to use a provided device that, when activated, contacts emergency services. FISCAL EFFECT : According to the Senate Appropriations Committee analysis, the estimated costs associated with the reporting requirements for the Controller to review the amount of revenue that gets allocated to public education at the end of each year for five years are estimated as minor and absorbable. In addition, the Senate Appropriations Committee analysis cites estimated costs for funding public education under this bill has potential for an unknown, but, significant, increase in revenue. However, there is potential for a one-time decrease in revenue from the State Lottery Education Fund during the first year implementation period of the modified formula. AB 142 Page 5 COMMENTS : This bill was substantially amended in the Senate and the Assembly-approved provisions of this bill were deleted. This bill, as amended in the Senate, is inconsistent with Assembly actions. According to the author, this bill seeks to increase the amount of funding education receives from the Lottery. The author also states, "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 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, AB 142 Page 6 adjusted annually for 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% 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. Prior and 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 AB 142 Page 7 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 by the Senate Governmental Organization.) AB 1654 (Budget Committee), Chapter 764, Statutes of 2008, would 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 (Perata), Resolution Chapter 143, Statutes 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), 2005-2006 legislative session , would have required, among other things, that at least 50% of multistate lottery revenues to be allocated to the public in the form of prizes, at least 42% must benefit public education, and no more than 8% to be allocated for Lottery expenses. (Died on the Assembly Floor). Analysis Prepared by : Rod Brewer / G. O. / (916) 319-2531 FN: 0003798