Lottery Modernization Act: Less Modern Than You Might Think

In the beginning
of “Pretty Woman,” when the camera pans over a party, and a magician
is playing slight-of-hand-tricks with some women, using witticisms aimed
at the (in)famous Savings & Loans of the 1980s? If you haven’t,
the man is performing a coin trick, where a coin disappears in one location,
and ends up in the next. Funny thing is, it could just as easily be
a metaphor for the Lottery Modernization Act.

Perhaps those behind the LMA
are fans of “Pretty Woman,” or simply got their inspiration from
a similar source. The thinking behind the LMA is this: borrow now from
one fund, in order to pay off expenses from another fund, which will
fund the expenses from where the new funding will be taken.

Got it?

Don’t worry. However, do
worry about the fact that this labyrinthine, and frankly anachronistic,
proposal has been touted as a major part of balancing by the California
budget, currently facing a deficit of more than $40 billion.

If passed,
it is expected to provide $5 billion “of borrowing from future lottery
profits to help balance the 2009-10 state budget,” according to the
Legislative Analyst’s Office. This proposition, which will be voted
on, come May 19, is described as the following by the Legislative Analyst’s
Office:

The measure makes major changes to the 1984 voter initiative
that created the California Lottery. These changes could increase lottery
ticket sales and allow the state to borrow $5 billion in the 2009-10
fiscal year from future lottery profits. In addition to borrowing this
$5 billion, the state also could borrow more from lottery profits in
future years. Under the measure, lottery profits now dedicated to schools
and colleges would be used to pay back the borrowing. The measure would
increase state payments to education from the state General Fund to
make up for the loss of these lottery payments.

Ironically, the LAO has noted
that borrowing on the lottery futures and owing more to the educational
institutions, would, down the road, actually “make it more difficult
to balance future state budgets.”

Just in case you were wondering,
the “borrowing” referred to in this plan is more of an IOU with
the hope of future assets: according to the LAO, the borrowing inherent
in this plan revolves around the selling of “future lottery profits”
as an asset to investors (with interest of course), via bond protocol
(which must be authorized first). The main benefit of this idea appears
to be the idea of profiting right now, via the upfront funding or “securitization,”
as explained by the state’s top analyst, and that this deal
would take something of a loophole; by allowing the lottery revenues/futures
and the General Fund to be kept separate, technically the taxpayer-funded
General Fund will not be the bank account funding those investors intrepid
enough to get in on this deal.

This odd and winding plan does appear
to present a solid business opportunity for businesspeople, on the bright
side, and California does desperately need any business it can get.

However, this kind of irresponsible
and poorly-thought out borrowing is precisely what got us into the current
financial predicament in the first place. It defies logic that in order
to save money, state officials would promote a course of action that would eventually offer up even more from the state coffers. If passed,
according to the LAO, not only will current funds be up for grabs, but
so will “lottery profits in future years.”

Basically, in the long
term, yes, the schools would profit after their initial diverted payments
(from the General Fund, which is about as dry as the Los Angeles River),
but the taxpayers will lose. (Just a little background: the voters specifically
authorized Proposition 37 one quarter-century ago, which directed that
the proceeds of the state lottery would benefit state educational institutions.
The amendment flies in the face of an order already in place for a reason,
and that reason has absolutely zero to do with balanced budgets, or
in this case, very much unbalanced budgets.)

Do the ends justify the means?
Would leaders rather balance the budget now for the sake of a temporary
fix, which in fact may permanently worsen the finances of the state,
or would they rather find a sustainable fix? As of now, the former appears
to be state lawmakers’ answer to a big problem.

A snake-oil salesman
and a magician can fool you, and fool you well: but once the charm of
the trick has worn off, are you any better off?