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Initial Examination on Reforming the California Lottery
Oct 01, 2007
Kevin Klowden, Anusuya Chatterjee, Anita Charuworn and Benjamin Yeo

The California Lottery was created to supplement education funding in 1984 through passage of Proposition 37 and enactment of the California State Lottery Act. The act authorizes the state to operate a cash prize lottery and establishes provisions for the disbursement of revenues. It empowers the governor to appoint commissioners who oversee lottery operations, and empowers the legislature to amend the act to further "the purposes of the act."

The Lottery Act outlines a specific division of funds: At least 34 percent of total revenues go to public education. At least 50 percent of total revenues must be returned to lottery participants as winnings. No more than 16 percent of the total revenue is to be set aside for lottery operational costs, including staff, printing, marketing, and distribution costs. The act stipulates that any funding not spent during the course of the year on prize payouts or administrative costs be automatically allocated to the state education fund at the end of the fiscal year.

This prevents the lottery from building up reserves of capital that can be used to fund more extensive marketing campaigns and instant win games with higher prize payouts. The lottery is also restricted in terms of the kinds of games that can be offered, as well in being able to utilize up-to-date technology. These restrictions prevent the California Lottery from effectively emulating either enacted or proposed changes in other states and countries.

Several other states (and countries) have enacted or are considering changes to their lotteries that should be considered in California as means for improving lottery performance. The most notable example of these include the establishment of an autonomous quasi-public lottery corporation in Connecticut; increasing lottery sales by raising the percentage of sales money returned to ticket buyers, as in Massachusetts and Texas; and the leasing of lottery operations to a private company or consortium, as has been done in the United Kingdom.

This paper reviews a number of options for reforming the lottery operations and boosting performance, and discusses the benefits and drawbacks of each. They include: maintaining the current lottery system with minor legislative changes; establishing a quasi-public corporation to operate the lottery; establishing a five- to ten-year lottery concession; establishing a thirty-year (or longer) lottery concession; outright sale to a private entity; and establishing a public corporation and holding an initial public offering.

This paper provides a general overview of the lottery's cost structure and performance over the past several years, compares California's performance against performance in states that lead the nation in per capita lottery sales and net revenues.

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