BILL ANALYSIS
Bill No: SB
570
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
SB 570 Author: Maldonado
As Amended: June 29, 2009
Hearing Date: August 25, 2009
Consultant: Chris Lindstrom
SUBJECT
California State Lottery.
DESCRIPTION
SB 570, an urgency measure, institutes a number of changes
to reform the California State Lottery Act (Act or Lottery
Act) of 1984. Generally, the changes: (1) modify the
definition as to what constitutes total revenues, (2)
modify the distribution percentages of total revenues, (3)
enhance the authority of the California State Lottery
Commission (Commission or Lottery Commission) to establish
the percentage of total revenues that will be allocated for
prizes and education, (4) authorize the allocation of $1
million a year to the Office of Problem Gambling (OPG)
within the State Department of Alcohol and Drug Programs
for problem gambling awareness and treatment programs, (5)
modify the percentage of total revenue allocated for the
expenses of the California State Lottery (Lottery), (6)
enhance the authority of the Director of the Lottery, (7)
modify 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)
provide 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.
Specifically, this bill:
SB 570 (Maldonado) continued
Page 2
1)Amends Section 8880.4 of the Government Code to require
the total revenues of the lottery, as defined by this
bill, to be allotted annually 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 California State Lottery
Commission (Commission or Lottery Commission).
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 Lottery Commission at a level
designed to maximize the total net revenues for
public education. Provides that, after the 2010-11
fiscal year, the total net revenues for public
education shall not be less than $1.28 billion a
year.
Repeals the requirement that at least 34% of the
total annual revenues are to be allocated to the
benefit of public education.
iii) Repeals the requirement that all
unclaimed prize money shall revert back to the
benefit of public education.
Provides that unclaimed prize money shall revert back
to the total revenues. (See amendment to Section
8880.65 - bullet Number 5)
iv) Repeals the requirement that all
interest earned upon funds held in the State
Lottery Fund shall be allocated to the benefit of
public education and shall not be considered as any
part of the 34% of the total annual revenues that
is required to be allocated for the benefit of
public education.
SB 570 (Maldonado) continued
Page 3
Provides that the interest earned upon the funds held
in the State Lottery Fund shall revert back to the
total revenues (See amendment to Section 8880.65
below - bullet Number 5).
v) Requires $1 million to be allocated to OPG
for problem gambling awareness and treatment
programs. Requires, no later than April 1 of each
year, the Director of OPG to report to the Lottery
Commission on the effectiveness of problem gambling
awareness and treatment efforts. Specifies that
the $1 million in funding shall not replace or
limit any other problem gambling awareness or
treatment activity determined by the Director of
the California State Lottery (Lottery) to further
the purposes of the Lottery Act.
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. Provides that if
the expenses of the Lottery are less than 13%, any
surplus funds may be carried over from year to year
upon a determination by the Lottery Commission that
the carryover furthers the purpose of the Act.
Provides that the aggregate amount of revenues
allocated for expenses plus carried over revenue shall
not exceed 16% of the total annual revenues for the
operating year. Excess carried over revenue above the
16% threshold shall be included in the 87% of revenues
allocated for prizes, education, and problem gambling
awareness and treatment.
c) Repeals language that certain reimbursements
received by the Lottery for the costs of goods and
services shall be allocated for the benefit of public
education and shall not be considered a part of the
34% of total annual revenues required to be allocated
to the benefit of public education.
Provides that reimbursements received by the Lottery for
the cost of goods and services shall revert back to
the total revenues.
2)Amends Section 8880.56 of the Government Code to:
SB 570 (Maldonado) continued
Page 4
a) Provide the Director with the express authority,
subject only to Lottery Commission approval, to:
i) Make any and all expenditures necessary and
reasonable for effectuating the purposes of the Act,
including, but not limited to, payment for the costs
of supplies, materials, tickets, independent audit
services, independent studies, data transmission,
advertising, promotion, consumer, retailer, and
employee incentives, public relations,
communications, compensation paid to the lottery
game retailers, bonding for lottery game retailers,
printing, distribution of tickets or shares,
reimbursement of costs of services provided to the
lottery by other governmental entities, and payment
for the costs of any other goods and services
necessary or reasonable for effectuating the
purposes of this chapter.
Repeals language that provides the Director with the
authority to purchase or lease goods and services as
necessary for effectuating the purposes of the Act.
ii) Award contracts, in all procurement
decisions, to the responsible supplier submitting
the best proposal that maximizes the benefits to the
state in specified areas and the objective of
raising net revenues for the benefit of the public
purpose described in this chapter.
Repeals language that authorizes the award of
contracts to the responsible supplier submitting the
lowest and best proposal.
b) Provide, with regard to employee incentives, the
Director shall exercise his or her authority
consistent with provisions related to State
Employer-Employee Relations.
c) Increase, from $100,000 to $500,000, the limit
(also known as the non-competitive bid contract limit)
for which the Lottery Commission shall adopt and
publish competitive bidding procedures for the award
of any procurement, contract, or subcontract.
d) Provide that if there are conflicts between the
SB 570 (Maldonado) continued
Page 5
provisions of the Act and any other provision of law,
that the provisions of the Act shall control.
3)Repeals Section 8880.63 of the Government Code that
requires, as nearly as practical, that 50% of the total
projected revenue, computed on a fiscal year basis,
accruing from the sales of all lottery tickets or shares,
shall be apportioned for payment of prizes.
4)Amends Section 8880.64 of the Government Code that not
more than 16% of the total annual revenues accruing from
the sale of all lottery tickets and shares from all
lottery games shall be expended for the payment of the
expenses of the Lottery.
5)Amends 8880.65 of the Government Code to define total
revenues of the Lottery shall include all revenue
received by the California State Lottery, including, but
not limited to, revenue from the sale of tickets or
shares, merchandising revenue, advertising revenue,
interest earnings on moneys in the State Lottery Fund,
and unclaimed prizes returned to or retained by the State
Lottery Fund. The net revenues of the lottery shall
include total revenues remaining after accrual of all
obligations of the Lottery for prizes and expenses.
6)Declares that the bill furthers the purpose of the
Lottery Act and requires a 2/3 vote of the Legislature.
7)Becomes effective immediately to generate much needed
revenue to respond to and help address the state's
current fiscal crisis.
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
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
SB 570 (Maldonado) continued
Page 6
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.
BACKGROUND
Purpose of the bill. According to the author's office,
"The purpose of the Lottery Act of 1984 is to produce the
maximum amount of revenues to support education. Currently
prize payouts are locked at 50% of total lottery sales and
the Commission does not have the authority to adjust
payouts to maximize revenue. This bill will give the
Lottery Commission the authority to adjust the prize payout
percentage while never delivering education less than $1.28
billion which is the most the lottery has ever paid to the
Lottery Education Fund at the State Treasurer's Office."
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.
SB 570 (Maldonado) continued
Page 7
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 24 years since
sales began in October 1985 through June 30, 2009, the
California Lottery has raised over $22 billion in
supplemental funding for public education. In addition,
since 1984, the Lottery's retail partners throughout the
state have earned over a little less than $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 OPG, 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 cost-of-living and student
growth adjustments. The ballot measure was not approved by
the voters.
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
SB 570 (Maldonado) continued
Page 8
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.
Arguments in support. Jack O'Connell, the State
Superintendent of Public Instruction, writes that "recent
budget cuts seriously threaten the improvement in the
student achievement we have seen over the last seven years,
and will likely hinder the progress California has made in
closing the achievement gap. We cannot allow California's
students to be penalized for our state's fiscal mess. It
is important that we continue to place a priority on
funding for education. We must consider new ideas and be
open to new ways of thinking. SB 570 reflects a new way of
thinking, by allowing revenue to be allocated to education.
Such additional revenue would greatly benefit our students
during these difficult financial times."
Arguments in opposition. The California Teachers
Association (CTA) opposes SB 570 because it contains a
finding that it "furthers the purpose" of the Lottery Act.
CTA believes, however, that it does not and that a court
would require it to be approved by the voters before it can
take effect. The most obvious problem is that it decreased
the amount of guaranteed funding going to schools. It does
this in three ways:
1)SB 570 deletes the requirement that 34% of lottery
revenues go to education, and replaces that with a
minimum payment of $1.28 billion. There is no
requirement that any more than $1.28 billion go to
schools (this measure allows the Lottery Commission to
SB 570 (Maldonado) continued
Page 9
set the percentage of revenues that go to education and
says it should do so "at a level designated to maximize
the total net revenues for public education" and to
ensure that the revenues are not less than the $1.28
billion. We do not read thie to require that any more
than $1.28 billion be provided to schools, although more
could be provided at the Commission's discretion. ) and
no increase in that floor to adjust it for inflation.
2)SB 570 deletes the requirement that all unclaimed prize
money goes to education. Instead, that money becomes
part of the pot that schools share with prizes.
3)SB 570 deletes the requirement that all unspent
administrative funds go to education at the end of the
fiscal year. Instead, any such unspent funds carry over
to the next year until the total amount allocated for
expenses reaches 16%; any excess over the 16% is shared
between prizes and schools.
CTA continues that providing a decreased amount of funding
to schools runs directly counter to the primary purpose for
the Lottery Act which is as follows :
The People of the State of California declare that the
purpose of this Act is support for preservation of the
rights, liberties and welfare of the people by providing
additional monies to benefit education without the
imposition of additional or increased taxes ?
Staff comments. (1) 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 and
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, among other things,
whether the changes that would: (a) modify the distribution
percentages of the total revenues for prize payouts and
education, and, (2) alter the funds to which certain
revenues (unclaimed prizes, interest earned from the
Lottery Fund, revenues that revert back to the Lottery,
etc.) are allocated (currently, these funds are allocated
to education and not considered part of the 34% for
education) can be made statutorily or only by a vote of the
people. Legislative Counsel has long held the opinion that
SB 570 (Maldonado) continued
Page 10
any changes to the Lottery Act that diverts money from
education need to go back to the voters for approval. One
interest group steadily concurred with that opinion in the
past.
On the other hand, the Lottery Commission maintains 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 sites 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 was expressly authorized by the voters,
provided such changes further the purpose of the Act. At
least one interest group has steadily concurred with the
Lottery Commission's interpretation. Additionally, the
Lottery points out that none of the statutory changes that
have been made to the Lottery Act have been the subject of
legal challenge.
(2) Why does the minimum guarantee for public education of
$1.28 billion begin in the 2011-2012 fiscal year? The bill
is an urgency measure. If enacted, all of the proposed
changes (which includes the change to prize payouts, amount
allocated to education, the change in the definition of
total revenues, etc.) would go into effect immediately.
Theoretically, it could be as early as the 2009-2010 fiscal
year. The provision providing a minimum guarantee of $1.28
billion for public education does not go into effect until
the 2011-2012 fiscal year. As such, education could
receive less than 34% of the total revenues for the
2009-2010 and 2010-2011 fiscal years, while at the same
time not realize the minimum guarantee of $1.28 billion per
year. The committee may wish to ask the author why such a
change is being made to the Act and how it furthers the
purpose of the Act, particularly, during the fiscal years
before the 2011-2012 fiscal year.
(3) Does the $1 million annual allocation to OPG further
the purpose of the Act? Although it is a worthy cause to
fund programs intended to mitigate the negative impacts of
the gambling on at risk, problem or pathological gamblers,
does the allocation of $1 million to OPG further the
purpose of the Act of generating more money for education?
Currently, the Lottery allocates over $100,000 a year for
the 1-800-GAMBLER help line. The money comes from the
SB 570 (Maldonado) continued
Page 11
percentage of revenues dedicated for the administration of
the Lottery. The committee may wish to ask the author if
the bill should specify that the $1 million allocation for
OPG should be allocated from the 13 - 16% of total revenues
dedicated for the expenses of the Lottery.
(4) Why change the distribution percentages and the
definition of total revenues? The bill changes the amount
of funds that will be allocated to prizes, education, and
administrative expenses of the Lottery. In addition, the
bill makes a number of changes that redirects funds that
are currently returned to education (and not calculated as
part of the 34% for education) to total revenues which will
be distributed for prizes, education and expenses for the
Lottery. Opponents to such proposals in the past argued
that these changes directly reduce the amount of funding
for education. Proponents of such proposals in the past
argue that every $1 increase in prize payout results in a
$7 increase in sales and a $2 increase in return to
education. Further, proponents argue that California has
one of the lowest prize payout rates, and, like other
states that increased the prize payout rates, California
could realize increased tickets sales and greater revenues
for education.
(5) Why expand the authority of the Director of the
Lottery? The bill enhances the authority of the Director
of the Lottery, from having the authority to purchase or
lease goods and services as necessary for effectuating the
purposes of the Act, to make any and all expenditures
necessary and reasonable for effectuating the purposes of
the Act. The expansion of the Director's authority is
subject to the Commission's approval. The committee may
wish to ask the author why such an expansion is necessary.
(6) Why make changes to the procurement and contracting
authority of the Lottery? The bill changes the procurement
and contracting authority of the Lottery to award contracts
to the best (not lowest and best) proposal and increases
the noncompetitive bid contract threshold from $100,000 to
$500,000. The committee may wish to ask the author why
such changes are necessary.
(7) Why elevate the provisions of the Lottery Act above
other provisions of state law? The bill provides that the
provisions of the Lottery Act will control in the event
SB 570 (Maldonado) continued
Page 12
that there are any conflicts between the provisions of the
Act and any other provision of law. The committee may wish
to ask the author why a change is necessary.
(8) Do the voters want to see the performance of the
Lottery improved? According to a survey conducted by Voter
Consumer Research, 61% of the voters surveyed (a survey of
800 statewide primary voters, April 2 - April 5, 2009)
support "modernizing the lottery to improve its performance
with increased payouts, improved marketing and effective
management." Conversely, when the "$5 billion of borrowing
from future lottery profits" and "debt-service payments on
this borrowing" elements of Prop 1C were examined, support
dropped to just 35 percent in the same survey. Committee
staff has not seen the survey questions or the methodology
of the survey, nor is it aware of any independent reviews
of the survey. As such, it is unclear if the survey
results are reliable.
PRIOR/RELATED LEGISLATION
AB 1654 (Budget), 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
(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)
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 1011 (Florez), 2006-2007 Legislative Session . Would
SB 570 (Maldonado) continued
Page 13
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
decreases 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)
SB 930 (Vincent), 2001-2002 Legislative Session . Would
have authorized the California Lottery to, among other
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. AB 1453 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.
SB 570 (Maldonado) continued
Page 14
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,"
"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.
SB 570 (Maldonado) continued
Page 15
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 : As of August 21, 2009:
Jack O'Connell, Superintendent of Public Instruction
OPPOSE : As of August 21, 2009:
California Coalition Against Gambling Expansion
California Teachers Association
FISCAL COMMITTEE: Senate Appropriations Committee
**********