Politics

SACRAMENTO (AP) ― Gov. Arnold Schwarzenegger's plan to use the lottery to help balance the state budget relies on rosy revenue projections that ultimately could complicate efforts to fund education, the state's legislative analyst said Monday.

Last week, Schwarzenegger proposed a $144.3 billion state budget that was balanced through a combination of spending cuts and a plan to pump up lottery sales and then borrow against that future revenue.

The governor proposed raising $15 billion over three years by selling the future lottery proceeds to investment firms. He wants to use a third of that money to help close the state's $15.2 billion budget deficit in the fiscal year that starts July 1.

Schwarzenegger's plan assumes a doubling of lottery sales and profits within five to 10 years through an expansion of lottery games and aggressive marketing. He wants to bring California's per capita lottery sales to the national average, doubling it from today's roughly $91 per person.

Elizabeth Hill, the state's nonpartisan legislative analyst, said she is concerned about the lottery reaching that goal.

"Our major concern with the governor's plan ... is that it makes overly optimistic and potentially unobtainable assumptions about the ability of the lottery to increase profits," she said in her review.

If that happened, the bond holders could take from the $1.2 billion that California public schools currently receive from lottery proceeds, Hill said. Distributions from the lottery to education could fall short by $5 billion over the next 12 years, according to her report.

Making up for that loss likely would require tapping the state's general fund, putting pressure on other spending priorities, she said in her report.

Schwarzenegger's office said the governor is committed to maintaining the state's overall level of education spending, even if lottery revenue falls short of projections and the state had trouble paying off the bonds to the investment firms.

Administration officials noted that Hill embraced the concept of selling lottery bonds based on future sales growth and agreed with Schwarzenegger's forecast that the sale could bring in about $15 billion.

"We're pleased that the LAO agreed we could raise $15 billion from the lottery, and we believe we have structured our proposal to ensure that education will continue to receive the amount of lottery revenue it currently receives," said Matt David, the governor's communications director.

Hill offered what she said was a less risky lottery bond that instead would bring in $5.6 billion.

She also was critical of Schwarzenegger's backup plan: raising the state sales tax.

The governor's plan to sell lottery bonds must pass the Legislature and then be approved by voters in November. If that fails, the state would be authorized to level a temporary 1 cent sales tax increase to close the budget deficit and store billions of dollars in the rainy day fund.

Even if approved by voters, the lottery plan could be stalled by legal challenges. Casino-operating Indian tribes have a monopoly on casino-style gambling in California and may not want competition from expanded lottery games.

Hill noted a key problem with the short-term projections for the sales tax: It could not be triggered until Jan. 1, 2009, and thus would produce only a half-year's revenue.

That would translate into about $3 billion, far less than the $5.1 billion Schwarzenegger seeks from the lottery sale, the legislative analyst said. That gap would revive the deficit in the 2008-09 fiscal year.

What is needed instead, Hill said, is longer-term budget reform. The Legislature should review both spending and tax formulas, including revisions to tax credits, deductions and exemptions. Hill's analysis said the state could bring in an additional $3.3 billion in the coming year by making just 11 changes to its tax structure.

Schwarzenegger has said he is open to examining tax loopholes, but his fellow Republicans remain opposed to anything that could be construed as a tax increase.

The state's budget crisis is due in large part to overspending, said Assemblyman Roger Niello, R-Fair Oaks, vice chairman of the Assembly Budget Committee.

"I think there are tax proposals that we want to avoid such as raising taxes in the face of a declining economy," Niello said.

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