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Lotteries: 'Mega-Bucks' Promise Is Disputed

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Sold to voters last year as a new and potentially lucrative source of revenue for schools, the California State Lottery debuts next month amid growing uncertainty over its long-term impact on education spending in that state.

School-finance experts caution that while lotteries are providing a new source of revenue for all state services, education by no means reaps a bonanza as a result. Nonetheless, the publicity and legislative ''earmarking" linking lottery earnings to school funding, the experts point out, may diminish the public's willingness to support vital school-related tax measures.

"I think the deceit takes the form that the lottery is sold as having a lot to do with education and it really doesn't," said Henry M. Levin, professor of education and economics at Stanford University.

In New York, state officials recently sought to counter the education-funding claims made for their lottery, saying it adds little if anything to what the state spends on schools. (See Education Week, Sept. 4, 1985.) California education officials say they fear a similar development in their state, with the legislature already signaling that it may cut other education appropriations in view of the infusion of lottery funds for education.

"We see a lot of potential similarities" to the New York situation, said Susan Lange, a spokesman for Bill Honig, California's superintendent of public instruction. "People think this money is going to be the answer to all of the problems of education. In fact, no school district is going to get a large enough amount of money to deal with the large expenses that school districts have."

"We're very concerned that the public has been misled," she said.

Growing Popularity

In the 20 years since New Hampshire adopted the first modern state lottery, their popularity as a relatively "painless" way for states to raise revenue has steadily increased.

"People like lotteries," said Allan Odden, professor of education at the University of Southern California. "When they're put to a vote, people vote them in."

Twenty-one states and the District of Columbia now operate lotteries, including seven--California, New York, New Hampshire, New Jersey, Michigan, Illinois, and Ohio--in which the proceeds are "earmarked" in part or in full for education.

Of the states that earmark, some, like California, dedicate a strict percentage of ticket sales, while others, such as Illinois, guarantee a minimum percentage. Still others, like New Hampshire, allocate to education whatever is left after paying for winnings and the lottery's administrative costs.

Long popular in the high-tax states of the Northeast, Midwest, and Mid-Atlantic regions, lotteries are now also gaining favor in the Southern and Western states, according to Steven Gold, a tax expert with the National Conference of4State Legislatures. Four states, including California, approved lotteries as recently as the 1984 general election. And one U.S. Congressman has even floated the idea of creating a national lottery to pay off the federal debt.

More for the State

But according to school-finance experts, the best that can be said for lotteries is that they bring additional funds into state treasuries. Since education is the largest single recipient of state funds, they note, anything that increases state revenues has the potential to benefit education.

"Education is such a significant share of state budgets that it's going to get its fair share of an incremental increase in state resources," said Mr. Gold.

"In the long run, you're dealing with one pot, and education is going to get a piece of that," added James Caterall, associate professor of education at the University of California at Los Angeles.

'Not a Good Way To Go'

But lotteries typically bring in much less money for schools and other services than the public has been led to believe, the experts say. In most states, lottery proceeds earmarked for education account for less than 5 percent of all education spending.

"Lotteries don't provide much money for schools," Mr. Odden said. ''People who feel they do are going to be really disappointed."

And the fact that lotteries are often sold to the public as major new revenue sources for education, Mr. Odden said, means they can have a "negative effect" on public support for tax measures that finance schools.

"I think people use lotteries as kind of a quick fix," said John Augenblick, a school-finance consultant. "In general, it's not a good way to go."

Earmarking for Education

As a practical matter, earmarking lottery funds for schools or other popular services helps build constituencies for the lottery.

"Politically, it makes a great deal of sense," Mr. Gold said. "Some people will support the lottery if it's earmarked for something they support. That's why, politically, earmarking is a powerful tool."

But earmarking can be deceptive, experts say, because legislators tend to discount those funds when making their appropriations. As a result, funds that the public believes are going to support education merely substitute for other state revenues, and spending for education may increase only slightly, if at all.

"The legislature can always have in mind that the lottery provides education with so much money, and reduce their appropriation by a like amount," said Mr. Caterall.

"Believing in earmarking is like believing in the tooth fairy," said Mr. Gold. "In general, there's no way to guarantee that money designated for one thing is going to be spent on that. You can't create airtight pockets."

"It's clearly not an educational phenomenon," said Mr. Levin. But education is something lottery proponents "grab onto because it reaches into every community and is uncontroversial," he said.

Some officials in lottery states argue that without the lottery state spending for education would decline. But others, noting that lottery funds provide a very small percentage of total education spending and that education is a high legislative priority, say any decrease would probably be slight.

In Michigan, for example, where the lottery is expected to raise $400 million for precollegiate education in fiscal 1986, the deputy state superintendent estimates that the legislature would make up all but 10 or 15 percent of that amount out of general funds if the lottery did not exist.

"Education would not suffer a $400-million loss," said Douglas Roberts. "The earmarking process does not benefit education. What does benefit it is the existence of the lottery."

Regressive Tax

Experts also agree that, to the extent that lottery funds earmarked for education free general revenues for other state services, they function as a tax. And some say it is a particularly regressive tax.

"It's pretty well understood that lotteries are regressive. That's just fact," Mr. Caterall said.

"They do take money from people who can't afford to part with it," concurred Mr. Levin.

Another charge leveled at lotteries is that, compared to other forms of taxation, they are inefficient.

"The administrative costs are high," Mr. Odden said. "Of every dollar raised, 35 cents goes to provide services, much more than for any other tax."

Proponents point out, however, that playing the lottery is a strictly voluntary form of taxation.

World's Largest Lottery

In California, Mr. Honig has tried with limited success to ensure that lottery proceeds will supplement, rather than substitute for, other state spending on education. According to Ms. Lange, "the legislature has not been too excited about putting that into statute."

Mr. Honig wanted the state to commit itself to allocating the same percentage of general funds to education that it now contributes--about 38 percent--in addition to lottery proceeds. But bills in the Assembly and Senate that would have established a state funding floor have not passed, Ms. Lange said.

The legislature has also added disclaimers to new education bills, excluding them from any base funding level that may be created, she said.

Ms. Lange said the department is concerned that, over time, lottery funds will come to supplant other state funding for education and that districts will become dependent on "an erratic" funding source.

"There will just be conveniently less money available to do the things we've already done, and inevitably that will lead us to reach into the lottery earnings to pay for them," she said.

"We feel strongly that the lottery passed because of its tie with education," Ms. Lange said. "That gave it a credibility it would not have otherwise had." Now, she said, "the average citizen will heave a sigh of relief and think that everything is taken care of and resist other increases."

But the lottery will raise only $250 million to $300 million for education this year, she said, or about $50 per child. The state spends about $14 billion on precollegiate education.

Other States

Other states that earmark lottery proceeds for education include:

New Hampshire. The first state to establish a lottery in the modern era, New Hampshire expects to raise $7.7 million for education in fiscal 1986, including $3 million4from the new "Tri-State Megabucks," which it operates together with Maine and Vermont.

The funds, which will be distributed to school districts through the state's new foundation formula, amount to about a third of equalized state spending. However, "it's a pretty minuscule amount in terms of having any impact," according to Neal Andrew, the deputy state superintendent.

New Hampshire is the one state in which it can be said that lottery funds supplement other state spending for education; without the lottery, officials agree, the share of education funding coming from lottery proceeds would not be replaced. The statute does not specify the percentage of ticket sales that go to education.

New Jersey. The state earmarks lottery funds for state institutions, including education, corrections, and human services. Precollegiate education is projected to receive about $168 million in lottery proceeds in fiscal 1986; all but about $8 million goes for state aid to districts and the rest is for administration of the state education department. That compares to a total state allocation for schools of $2.7 billion.

The state budget director decides how lottery proceeds are divided between the different institutions. At least 30 percent of ticket sales must be spent on services.

Michigan. Lottery proceeds will amount to about $400 million in fiscal 1986, out of a state appropriation of $2.2 billion. About 45 percent of lottery ticket sales go to education.

New York. Lottery proceeds are projected at $700 million for fiscal 1986. The state spends about $6 billion on precollegiate education. General-fund revenues for education are reduced by the amount that the lottery raises.

About 45 percent of ticket sales are spent on education.

Ohio. Out of a K-12 state appropriation of $3.25 billion for fiscal 1986, the lottery will contribute $363 million, or about 10 percent. That amounts to about 5 percent of all education spending in the state. "It's certainly not the lifeblood of the Ohio education scene," said G. Robert Bowers, the assistant state superintendent.

The lottery raised $168 million more for education in 1985 than had been projected; those funds were placed in a special account to cover possible shortfalls in formula-driven appropriations. If there are no shortfalls, the balance will be distributed to districts on a per-pupil basis.

Illinois. Gov. James Thompson signed into law last week a bill that earmarks all lottery proceeds for education. However, the fiscal 1986 appropriation for education remains unchanged at $2.64 billion. Lottery proceeds are projected at $520 million.

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