BILL ANALYSIS                                                                                                                                                                                                    



                                                                AB 142
                                                                Page  1

        CONCURRENCE IN SENATE AMENDMENTS
        AB 142 (Hayashi)
        As Amended  March 11, 2010
        2/3 vote. Urgency
         
         
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        |ASSEMBLY: |75-0 |(April 20,      |SENATE: |32-0 |(March 22, 2010)     |
        |          |     |2009)           |        |     |                     |
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             (vote not relevant)


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        |COMMITTEE VOTE:  |18-0 |(March 23, 2010)    |RECOMMENDATION: |concur    |
        |                 |     |                    |                |          |
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        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,









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             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,








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             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  








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          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. 









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         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,  








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        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  








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        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


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