For Governor Arnold Schwarzenegger, the winning numbers lie in the state lottery.
The governor’s revised budget, released last week, includes a plan to borrow from future lottery revenues to alleviate the $17.2 billion budget gap in the upcoming fiscal year.
“This way we don’t have to raise revenues from the people, because we have an underperforming asset sitting there,” Schwarzenegger said in a press conference. “Our lottery does not perform at 100 percent. Our lottery is 28th in the nation … and you know California doesn’t like to be 28th in anything.”
The lottery currently generates $3 billion in annual sales. The governor says sales could be increased to $6 or $7 billion. Under his plan, this would allow the state to borrow up to $15 billion over the next three years. The money would be directed toward a new “rainy day” fund, which would provide revenue in deficit years.
The lottery plan would require approval from California voters in November. If voters do not approve, or if revenues from the lottery fall short, the state sales tax would increase by 1 percent until the rainy day fund is full.
Some of the governor’s most controversial proposals from January do not appear in his revised budget. Plans to close state parks, cut education funds and release prisoners early have all been scrapped. The lottery solution, however, is proving to come with controversy of its own.
Legislative analyst Elizabeth Hill, a nonpartisan advisor to the state legislature, has called the plan flawed.
“The administration makes overly optimistic estimates about the potential growth in lottery sales and profits,” Hill said in her printed analysis of the governor’s revised proposal. The way the budget plan is structured presents a significant risk to education funding, she said. Her alternative is a scaled-down plan that would result in $5.6 billion over two years.
But Michael Jones, former head of the Illinois State Lottery, said increasing California’s lottery sales is “extremely feasible.”
“There’s a significant potential if the lottery marketed itself to a wider group of California adults than it does now,” he said. “The reason that someone doesn’t play the lottery is not because of regulation, but because there is no desire to. That’s a classic marketing problem.”
Jones, who now runs the lottery consulting firm Michael Jones and Company, said studies have found that the lottery has the approval of somewhere near 80 percent of California adults.
“It’s poor appreciation of the brand, poor brand image and a series of marketing decisions that are not appealing to California,” he said. “The United Kingdom has a private contractor which runs the lottery for a percentage of sales … perhaps [Gov. Schwarzenegger] should start contemplating trying to hire a private company.”
Another issue that has arisen is a potential conflict between Indian gaming and lottery sales. In her analysis of the governor’s revised budget, Hill noted the rapidly growing tribal casino sector as a threat to future lottery sales. Others say this threat may be overstated.
“These are two entirely different worlds,” Jones said. “Lotteries are not really a gamble. A gamble is when you’re in a casino beating two-to-one odds, four-to-one odds. The idea of a lottery is that you have people who play the lottery because it is so widely dispersed over tens of thousands of retailers. They’re not going to those retailers to play the lottery; they’re going to do other things.”
Dean Gerstein, vice provost and director of research at Claremont Graduate University, said it’s difficult to say whether Indian gaming has an impact on lottery participation.
“I’m not sure there’s really much evidence about whether there’s a stimulative or substitution effect,” Gerstein said. “The lottery is very convenient, and therefore people may buy more lottery tickets than they would if casinos were more widely distributed.”
There just isn’t enough evidence to say conclusively, he said.
Now that the governor has released his revised budget, the state legislature will vote on a final budget to be signed by the governor before the fiscal year begins July 1.
JEREMY OGUL can be reached at firstname.lastname@example.org.