Prop 1C would borrow from lottery to help close state's deficit

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Governor Schwarzenegger releases his annual revision to the state budget. The governor's doing the "May Revise" early to get a message to voters before next week's special election. He wants to show the budget cuts the state faces if the five budget measures on the ballot fail. One of those measures, Proposition 1C, would have the biggest immediate effect on California. KPCC's Julie Small reports.

Julie Small: Proposition 1C – the "Lottery Modernization Act" – would increase California's lottery prizes in the hopes of boosting ticket sales. Julie Soderlund with the lobby group "Budget Reform Now" says it's about time.

Julie Soderlund: The state of New York has about half the population as California, yet their lottery performs at three times the level as ours does.

Small: Two years ago, the state lottery sold $3 billion in tickets. About a billion of that went directly to public schools. Soderlund says modernizing the lottery will help schools even more.

Soderlund: The fact is that the people of California deserve to have that asset maximized.

Small: Maximized and leveraged. The main purpose of Prop 1C is to let California borrow $5 billion against future lottery sales. The money goes to plug the state budget deficit this year. But Michael Cohen with the Legislative Analyst's Office warns Prop 1C could burden the state next year.

Michael Cohen: We see it being harmful to balance the budget in the future.

Small: Cohen is part of the non-partisan team that writes the voter guide's fiscal analyses for ballot measures. He says Prop 1C would substitute the lottery's annual billion-dollar payout to schools with money from the state's general fund. That works if – and it's a big if – lottery revenues go up.

If they stay flat – somewhere around a billion dollars a year – California will have to use nearly half of that money each year to repay Prop 1C's $5 billion loan from the lottery. Cohen explains schools would be owed a billion dollars – so California would be funding them and going in to the red to do it.

Cohen: In simple terms, you'd end up with about $600 million of net revenue to pay a billion-dollar obligation to schools every year.

Small: Proposition 1C supporters are betting that lottery ticket sales won't stay flat, but will go up. If the Prop 1C crowd wins the bet, there's no problem. But Dean Murakami with the California Federation of Teachers is fed up with that kind of gamble.

Dean Murakami: Borrowing and borrowing and borrowing and then hoping we can pay it in the future, I think is just wrong.

Small: Murakami says California's second largest teacher union opposes Proposition 1C because it's the same kind of budget strategy that got California into a fiscal mess. Murakami teaches biological psychology at American River College in Sacramento. He says California lawmakers are in denial.

Murakami: The governor talks about, "Oh, we need this so we can balance our budget for today." Well if you're having trouble paying your bills and you borrow $10,000, it doesn't mean that you're no longer in debt. You're in bigger debt because you're going to be paying off the interest in the future.

Small: Dean Murakami says it's time for Sacramento to deal with budget reality. He's says the California Federation of Teachers wants no part of Prop 1C or other budget-balancing schemes. Murakami says his union is willing to accept more cuts to education this year – as long as lawmakers also raise taxes to fully fund education and other important programs in the future.