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
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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
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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
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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
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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
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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
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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
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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
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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,"
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"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
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OPPOSE :
None registered.
FISCAL COMMITTEE: Senate Appropriations Committee
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