Monday, May 19, 2008


“Our major concern with the governor's plan ... is that it makes overly optimistic and potentially unobtainable assumptions about the ability of the lottery to increase profits,” Elizabeth Hill, the state's nonpartisan legislative analyst said in her review.

By Tom Verdin and Don Thompson | ASSOCIATED PRESS  | from the san Diego Union Tribune


3:59 p.m. May 19, 2008  — SACRAMENTO – Gov. Arnold Schwarzenegger's plan to use the lottery to help balance the state budget relies on rosy revenue projections that ultimately could complicate efforts to fund education, the state's legislative analyst said Monday.

Last week, Schwarzenegger proposed a $144.3 billion state budget that was balanced through a combination of spending cuts and a plan to pump up lottery sales and then borrow against that future revenue.

The governor proposed raising $15 billion over three years by selling the future lottery proceeds to investment firms. He wants to use a third of that money to help close the state's $15.2 billion budget deficit in the fiscal year that starts July 1.

Schwarzenegger's plan assumes a doubling of lottery sales and profits within five to 10 years through an expansion of lottery games and aggressive marketing. He wants to bring California's per capita lottery sales to the national average, doubling it from today's roughly $91 per person.

Elizabeth Hill, the state's nonpartisan legislative analyst, said she is concerned about the lottery reaching that goal.

“Our major concern with the governor's plan ... is that it makes overly optimistic and potentially unobtainable assumptions about the ability of the lottery to increase profits,” she said in her review.

If that happened, the bond holders could take from the $1.2 billion that California public schools currently receive from lottery proceeds, Hill said. Distributions from the lottery to education could fall short by $5 billion over the next 12 years, according to her report.

Making up for that loss likely would require tapping the state's general fund, Hill said.

“That would increase the budget problem they're already having,” she said during a news conference after her analysis was released.

Schwarzenegger's office said the governor is committed to maintaining the state's overall level of education spending, even if lottery revenue falls short of projections and the state had trouble paying off the bonds to the investment firms.

Administration officials noted that Hill embraced the concept of selling lottery bonds based on future sales growth and agreed with Schwarzenegger's forecast that the sale could bring in about $15 billion.

They also stressed the lottery sale was part of a two-pronged strategy: Close the deficit for the coming fiscal year while creating a long-term reserve fund that could be tapped in the future when revenue falls.

Schwarzenegger said he has yet to see a better plan.

Speaking to reporters Monday after an event in Coronado, he criticized lawmakers for pouncing on his revised budget proposal while proposing no substantive alternative.

“The very people that are cautioning and that are having better ideas are the very same people that were sitting there when California was almost in bankruptcy in 2003,” he said.

In remarks earlier to about 30 local elected officials and community leaders, he said California's finances will “go off the cliff” if Democrats (who want higher taxes) and Republicans (who want spending cuts) refuse to compromise.

Increasing the lottery's performance and selling bonds based on that future revenue is just that sort of compromise, Schwarzenegger said.

“We need revenues without raising taxes,” the governor told reporters in Coronado. “This is the place to go.”

The legislative analyst agreed with the administration that selling bonds from a higher-performing lottery should be part of the budget solution. But she offered what she said was a less risky proposal that instead would bring in less revenue – $5.6 billion – and place all that in the state's general fund, rather saving some for future years.

She also was critical of Schwarzenegger's backup plan: raising the state sales tax.

The governor's plan to sell lottery bonds must pass the Legislature and then be approved by voters in November. If that fails, the state would be authorized to level a temporary 1 cent sales tax increase to close the budget deficit and store billions of dollars in the rainy day fund.

Even if approved by voters, the lottery plan could be stalled by legal challenges. Casino-operating Indian tribes have a monopoly on Las Vegas-style gambling in California and may not want competition from expanded lottery games.

Hill noted a key problem with the short-term projections for the sales tax: It could not be triggered until Jan. 1, 2009, and thus would produce only a half-year's revenue.

That would translate into about $3 billion, far less than the $5.1 billion Schwarzenegger seeks from the lottery sale to close the budget deficit. That gap would revive the deficit in the 2008-09 fiscal year, the analyst said.

Administration officials said they are confident voters will support the lottery bond and that the state will not have to resort to the sales tax increase.

What is needed instead, Hill said, is longer-term budget reform. The Legislature should review both spending and tax formulas, including revisions to tax credits, deductions and exemptions. Hill's analysis said the state could bring in an additional $3.3 billion in the coming year by making just 11 changes to its tax structure.

Schwarzenegger has said he is open to examining tax loopholes. Separately, he and Assembly Speaker Karen Bass, D-Los Angeles, have proposed creating a commission to examine California's tax laws.

The governor's fellow Republicans remain opposed to anything that could be construed as a tax increase.

The state's budget crisis is due in large part to overspending, said Assemblyman Roger Niello, R-Fair Oaks, vice chairman of the Assembly Budget Committee.

“I think there are tax proposals that we want to avoid such as raising taxes in the face of a declining economy,” Niello said.

Associated Press writers Samantha Young in Sacramento and Allison Hoffman in San Diego contributed to this report.

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