BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
142 (Hayashi)
Hearing Date: 3/15/10 Amended: 3/11/10
Consultant: Maureen Ortiz Policy Vote: G.O. 9-0
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BILL SUMMARY: AB 142, an urgency measure, modifies the
allocation formula of revenue generated from the California
State Lottery, and contains language to require the repeal of
the modified formula if the Controller determines that the
revenue allocated to benefit public education is less than a
specified amount.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Controller: review/report -------------minor,
absorbable-------------- General
Funding for public education: ----potential for unknown
increase
in revenue
possibly multi-million-- Special*
-----potential
for unknown one-time
decrease in revenue----- Special*
*State Lottery Education Fund
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STAFF COMMENTS: This bill may meet the criteria for referral to
the Suspense file if there is a decrease in revenue allocated to
the benefit of public education during the first year
implementation period of the modified formula.
Under current law, revenue derived from the sale of lottery
tickets is allocated in the following manner: a) not less than
84% of the total annual revenues are to be returned to the
public in the form of prizes and to the benefit of public
education; b) 50% of the total revenues must be returned to the
public in the form of prizes; and c) at least 34% is allocated
to the benefit of public education. Interest earned, as well as
unclaimed prize money, is allocated to the benefit of public
education. To the extent that expenses of the lottery are
currently less than 16% of total annual revenues, the Lottery
Commission can allocate those funds toward prizes.
AB 142 revises the allocation of lottery revenue in the
following ways:
a) Provides that not less than 87% (increased from 84%) of the
total annual revenues from the sale of lottery tickets shall be
returned to the public in the form of prizes or contributions to
public education, thereby reducing the percentage of revenue
that can be used for administrative expenses from 16% to 13% of
total sales,
b) Allows the Lottery Commission to determine the percentage of
total annual revenues that will be allocated for prizes, but
requires that this amount be at least 50% of the total revenues,
and
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AB 142 (Hayashi)
c) Requires the Lottery Commission to establish the percentage
of the total annual revenues to be allocated to the benefit of
public education at a level that maximizes the total net
revenues to the benefit of public education. Recent amendments
clarify the intent of maximizing revenues to public education
including in the first full fiscal year following enactment.
AB 142 requires the State Controller to review the amount of
revenue that gets allocated to public education at the end of
each year for five years, and then repeals the modified
allocation formula in this bill if in any of those five years
the Controller determines that the revenue to public education
fell short of the amount allocated in the last full fiscal year
prior to the enactment of this bill (presumably FY 2008-09).
Consequently, AB 142 does leave the allocation to public
education vulnerable for one year in the event that a
determination is made that funding provided to schools was less
than the amount in FY 2008-09 - $1,048,694,000. However, if
the modification of the allocation formula does result in
additional lottery sales as the Lottery Commission believes,
there could be a significant increase in the amount of funding
that is allocated to the benefit of public education. The
intent of this bill is to maximize the amount of revenue that is
allocated to public education.
Since its inception, the Lottery Act has provided approximately
$1 billion annually to the benefit of public education.
However, it has also consistently been underperforming as
compared to other state's lotteries. AB 142 is an attempt to
revive gross ticket sales which in turn will increase money for
public schools. Sponsors believe that revenue allocated to
public education may increase 50% within five years.
AB 142 also contains the following provisions:
a) Requires the Lottery Commission to calculate and report to
the Controller and the Legislature on the amount of total net
revenues allocated to the benefit of public education for that
fiscal year,
b) Requires the Controller to report to the Legislature by
September 1 of each of the first five fiscal years whether a)
the total net revenues allocated to the benefit of public
education are less than the amount that was allocated during the
last full fiscal year prior to the enactment of AB 142 (FY
2008-09), or b) the annual average total net revenues allocated
to the benefit of public education is less than the total
allocated in 2008-09 adjusted for an annual growth rate of 1.8%
or the actual growth rate of lottery revenues, whichever is
greater. AB 142 requires the Controller to notify the
Legislature and the Governor, and post that notification on its
Internet Web site, if a determination is made that both of these
events have occurred. If they have occurred, the provisions of
AB 142 which allow for the new reallocation formula of lottery
revenue will be repealed, and the current formula which
guarantees an allocation of 34% of total sales to public
education will be reinstated.
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AB 142 (Hayashi)
The California State Lottery was enacted in 1984 after the
voter-approved passage of Proposition 37. The initiative
guaranteed that at least 50% of sales revenue would be returned
to the public in the form of prizes, and 34% would be allocated
to the benefit of
public education. Since the enactment of the state lottery, the
Act has been amended numerous times through legislation which
was deemed to further the purpose of the Act.
The Lottery currently generates total sales revenue of
approximately $2.96 billion annually, with over $1 billion
allocated to the benefit of public education. The intent of AB
142 is to allocate more money to prizes which in turn is
expected to generate an increase in total sales revenue,
allowing for an increase in the current level of funding
allocated to public education. However, the exact impact of
these changes will be a result of allocation strategies of the
Lottery Commission, incentives to retailers, and other marketing
events - all of which may ultimately influence the consumers'
behavior on lottery spending.
According to the proponents, other states that have increased
the money allotted for prizes have subsequently realized an
increase in total revenue from sales. For instance, the state
of New York showed a progressive increase in lottery ticket
sales from 2000 to 2008 after higher payouts began in the fall
of 1999.
In 2008 after a prolonged budget impasse, Proposition 1C was
placed on the ballot as a lottery package which would have
allowed for the modernization of the Lottery and the use of
Lottery revenues to securitize the sale of bonds, upon voter
approval. Estimates were that Proposition 1C would have
provided $5 billion in additional revenues to the state from
increased sales resulting from modernization of the Lottery and
the sale of bonds. Proposition 1C would have also allowed the
Lottery Commission to modify the distribution percentages of
total revenues from the Lottery. The ballot measure was not
approved by the voters.
According to the Senate Governmental Organization Committee
analysis, 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
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 public education
by the Lottery.
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AB 142 (Hayashi)
Since the enactment of the Lottery Act, numerous legislative
measures have been enacted that made various changes to the
administration of the Act. Additionally, many measures have
been proposed that would have modified the allocation formula of
lottery sales revenue which did not pass the Legislature. Some
of the latter bills include SB 570 (Maldonado), 2009-10; SB 1011
(Florez,), 2005-06; and SB 329 (Perata), 2003-04. An initiative
is currently being circulated that is substantially similar to
the provisions
of this bill. If sufficient signatures are gathered, the
initiative could appear before the voters on the November 2010
statewide ballot.
AB 142 includes Legislative findings that the bill furthers the
purpose of the California State Lottery Act of 1984 and,
therefore, it will require a 2/3 floor vote.