Improving the Lottery's Performance

In 1984, the voters approved the establishment of the California Lottery.  Net lottery proceeds are currently used to supplement funding for education.  Projected revenues of the lottery for 2007 are about $3.2 billion in sales, with approximate net proceeds to education after prize payouts and operating costs of about $1.1 billion.

Compared to the other 40 states with lotteries, California's lottery is an underperformer.  Per capita average sales of all the states is $158, and the average of the ten most populous states is $190.  In contrast, California's is only $81 in average per capita sales.  Clearly, there is room for a greater return on the public's support of the lottery. 

The Administration proposes that the Lottery be leased to a private concessionaire who could bring sales up to at least the national average, and in so doing produce a significant financial benefit to the state while holding education harmless.  Various banking and investment firms have evaluated the concept in several states of turning over lottery operations to private concessionaires.  Those analyses uniformly conclude that operating a state lottery would be an attractive proposition to the investment community, especially in cases like California where there is so much potential capacity to improve lottery performance.  Although the estimates of the net value to the state of entering into such a concession arrangement range broadly depending upon the assumptions used, it appears clear that the value is many billions of dollars under virtually any set of assumptions.  Ultimately, the market will determine the lottery's value when the state engages in a rigorous competitive process of bidding and negotiations with potential concessionaires. 

The Administration is not proposing a detailed plan for utilizing lottery concession proceeds at this time.  That decision is one that needs to be jointly made by the Executive and Legislative branches, and discussions on that point have not yet begun.  Nevertheless, the Administration does believe that there should be two priority uses for those funds:

• First and foremost, the proceeds must be used to guarantee, at a minimum, that education receives the same dollar level of funding that it received in the highest year of lottery funding.  This guarantee alone will enhance the lottery's financial benefit to education, since the lottery currently is an inconsistent provider of funding.  Lottery proceeds have risen and fallen over the years, and so have not been a predictable source of funding.  A basic principle of any structure for utilizing concession funding should be to guarantee a steady, more predictable funding source for education.
• Secondly, any one-time proceeds should be used to retire existing state debt.  Retiring debt should be a priority because it frees up money that is currently used to pay annual debt service, thus turning a one-time funding source into a more flexible ongoing funding source.

Operating a lottery is not a part of the core mission or competency of government.  It is a sales, marketing and technology business.  Turning the operation of the lottery over to a private concessionaire that specializes in these activities would not only be a good business move for the state, it would be good policy, since it removes an operational distraction from the state's core mission of providing public services.  However, the state would retain underlying ownership of the lottery and would continue to regulate it in the interest of public protection.