January 21, 2010
Pursuant to Elections Code Section 9005, we have
reviewed the proposed statutory initiative relating to the California
Lottery (A.G. File No. 09‑0099).
Existing Lottery Laws
Lottery Created by a Voter-Approved
Measure. California voters approved Proposition 37 in 1984.
Proposition 37 authorized creation of the California Lottery and
dedicated lottery profits to education. It created the California State
Lottery Commission, which consists of five persons appointed by the
Governor and confirmed by the State Senate. The commission oversees the
640-person state department that administers the lottery.
Laws Governing Lottery Funds.
Proposition 37 directs how lottery funds are used. It requires that
50 percent of these funds be returned to lottery players as prizes.
(This means that, on average, a lottery player in California claims
about 50 cents in prizes for every dollar spent on tickets.) Currently,
the lottery may spend no more than 16 percent of its ticket sales on
lottery operating expenses. The law dedicates lottery profits—the funds
remaining after payment of prizes and lottery operating expenses—to
public educational institutions, including school districts, community
colleges, the University of California system, and the California State
University system. These payments to educational institutions must equal
at least 34 percent of the funds generated from lottery ticket sales
Current Lottery Funding for Education
Lottery Payments Are a Small Part of
Education Funding. In the 2008-09 fiscal year, the lottery sold
about $3 billion of tickets, paid out $1.6 billion in prizes, and spent
$396 million on operating expenses, most of which consist of sales
commissions, bonuses, and other payments to the retailers that sell
lottery tickets. This left just over $1 billion in lottery profits,
which were distributed to public educational entities based on their
number of students. This amount represents only a small part of the
overall budget of California's public education institutions. For
kindergarten through twelfth-grade schools, for example, lottery funds
made up just over 1 percent of all revenues in 2008-09.
Changes to Lottery Operations
More Flexibility for Lottery in Its Prize
Payouts. This measure gives the lottery the flexibility to
increase the percentage of lottery funds returned to players as prizes.
Higher prize payouts can attract more spending for lottery tickets and
increase lottery profits. Under this measure, the lottery commission
could set prize payouts above 50 percent of lottery sales—at the level
it determines will produce the maximum amount of lottery profits to be
provided to educational entities each year.
Changes to Laws on Lottery Operating
Expenses. This measure reduces the maximum amount of lottery
operating expenses from 16 percent of lottery funds each year to
13 percent of these funds. (Since the lottery currently spends only
about 13 percent of lottery funds—less than the maximum now allowed—on
operating expenses, this change probably would have little or no
immediate effect on lottery operations.)
Lottery Operating Changes Could Be Repealed
in Certain Instances. This measure requires the State Controller
and the state's Director of Finance to review the total amount of funds
provided by the lottery to educational entities in each of the first
five fiscal years after its effective date. If in any of those fiscal
years the amount of funds provided to educational entities is less than
the amount provided to educational entities in the last full fiscal year
prior to this measure taking effect, then all of the proposed lottery
operating changes described above would be repealed. If this occurred,
the lottery would resume operating under the laws that were in effect
prior to approval of this measure.
Lottery-Related Reporting Requirements
This measure requires various lottery-related
reports to be posted to the Web site of the California Lottery. These
requirements would be permanent, regardless of whether or not the
proposed operating changes described above are repealed in the first
five fiscal years after this measure takes effect.
Increased Prize Payouts Are Likely to
Increase Lottery Sales and Profits. Each Californian spends an
average of $83 each year on lottery tickets—considerably less than the
average resident of other states with a lottery. There are probably many
reasons this is so, including the other entertainment and gambling
options available for residents here. California's relatively low
lottery prize payouts (about 50 cents in prizes for every dollar spent
on lottery tickets) likely also contributes to the lottery's relatively
weak sales. Higher prize payouts appear to attract more players and
greater spending for lottery tickets. For example, the Massachusetts
State Lottery—one of the leading lotteries in sales per resident—returns
over 70 percent of its funds to players as prizes. In 2002, the Florida
Legislature authorized that state's lottery to grow its prize payouts.
Within five years, Florida Lottery sales grew substantially. Based on
the evidence from other states, we conclude that if voters approve this
measure, sales and profits of the California Lottery could grow
significantly compared to how much they would grow under current law.
This growth could result in future lottery sales being substantially
higher. Because a greater share of lottery profits would be given back
to players as prizes, lottery profits would grow by a smaller
percentage than lottery sales. We estimate that lottery profits would
increase by hundreds of millions of dollars per year compared to what
they would be under current law.
Choices by Consumers and Lottery Officials
Would Affect Growth. While lottery sales and profits could grow
substantially if this proposal is approved, the precise effects of this
measure cannot be predicted. The amount of sales and profit growth would
depend on how California consumers react to the products offered by the
lottery in the future, as well as trends in the state's economy. In
addition, the lottery's financial performance would depend on many
decisions made by the commission and lottery staff. They would decide,
among other things, the level of lottery prize payouts, how lottery
games will be marketed to the public, and how lottery retailers
throughout California will be encouraged to sell lottery tickets. If any
of these factors or similar factors contribute to a decline in lottery
sales or profits during the first five full fiscal years after this
measure is approved, the lottery would resume operating under existing
laws governing the use of its funds. In this scenario, this measure
would have no significant long-term effect.
The measure would have the following major fiscal
effect on state and local governments:
Estimated increase of several hundred million
dollars per year in lottery profits paid to public educational
entities. Exact amount of lottery sales and profit growth, if any,
would depend on choices by consumers and lottery officials.
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