Amend the Lottery Act to Abolish the Lottery Stabilization Fund

The state should amend the Lottery Act to abolish the Lottery Stabilization Fund requirement and use the income to fund critical services.


Background
The State Lottery Act (HB 54, 72nd Legislature, Regular Session), adopted in November 1991, requires the establishment of a Lottery Stabilization Fund in fiscal 1994. The fund will contain lott ery revenue in excess of the Comptroller s Biennial Revenue Estimate. The Lottery Stabilization Fund is then to provide revenue to the General Revenue Fund if the lottery fails to generate monthly revenue as estimated.

Beginning in fiscal 1994, in months that lottery revenue exceeds the one-twelfth of the annual estimate, the Comptroller is required to deposit $10 million plus the amount of net lottery revenue in excess of the estimate to the Lottery Stabilization Fund. The Act provides only two circumstan ces under which revenue could be transferred from the Lottery Stabilization Fund to the General Revenue Fund. In months that lottery revenue is less than 90 percent of one-twelfth of the annual estimate, the difference is to be transferred from the Lottery Stabilization Fund to general revenue. The Act also provides for the transfer of one-half of the balance of the Lottery Stabilization Fund to the General Revenue Fund on the first day of every biennium, beginning in fiscal 1996.

In view of the seriousness of the state s fiscal situation, the Legislature should set aside the stabilization fund requirement. The state already maintains a significant rainy day fund, and effective revenue forecasting should be adequate to avoid problems with potential future revenue stream instability.


Recommendation
The state should repeal the provision in the State Lottery Act that establishes the Lottery Stabilization Fund. This action would provide additional revenue to the General Revenue Fund to be used for state prog rams at the Legislature s discretion. Gains from this change could be realized as early as fiscal 1994.


Implications
Releasing Lottery Stabilization Funds would increase the available revenue for state programs without increasing taxes. General revenue is reduced by at least $10 million in months when lottery revenue exceeds one-twelfth of the annual lottery estimate. In effect, the state is penalized for correctly estimating lottery revenue and operating the lottery efficiently. Repealing the provision that establishes this fund would remove this penalty.

The adverse effect of abolishing the Lottery Stabilization Fund is minor. The Lottery Stabilization Fund is likely to be unnecessary and unwarranted by the large balances that would be maintained in the fund. Monthly variations in lottery revenue are small and tend to cancel out over the fiscal year. Lotteries in other states, operating from 1981 to 1991, met or exceeded the previous year s gross revenue 84.3 percent of the time. Seven states operating l otteries have never had declining gross lottery sales.

This action would increase general revenue about $65 million per year in fiscal 1994 and 1995.

Fiscal Impact
The fiscal estimate assumes an effective date of September 1, 1993. There would be a gain to general revenue of $130.2 million during the 1994-95 biennium. In fiscal 1998, however, the transfer from the stabilization fund to general revenue is expected to be $98.2 million, while income to the stabilization fund (from general revenue) is expecte d to be $66 million for a net gain to general revenue of $32.2 million. If the Lottery Stabilization Fund is eliminated these transactions would not occur, so general revenue would lose this amount.

Gain/(Loss) Gain/(Loss)
Fiscal to the General to the Lottery Change
Year Revenue Fund 001 Stabilization Fund 173 in FTEs

1994 $ 65,024,000 $(65,024,000) 0
1995 65,255,000 (65,255,000) 0
1996 348,000 (348,000) 0
1997 65,716,000 (65,716,000) 0
1998 (32,228,000) 32,228,000 0