Californians Doubt Schwarzenegger’s Plan to Borrow against the Lottery

Published July 1, 2008

California Gov. Arnold Schwarzenegger (R) has proposed borrowing against future earnings in the state lottery to solve the state’s budget deficit, currently estimated at $17 billion.

Schwarzenegger’s office says the borrowing decision avoids cutting funds for education, state parks, beaches, and California prisons. But success in the plan would require a several-billion-dollar growth in the “underperforming” lottery, according to analysts, and could cost at least $23 billion in interest over 30 years to repay $15 billion in borrowed money.

Voter Approval Uncertain

California voters would have to approve the move. A decision to put the issue to voters this November rests with state lawmakers, as there is not enough time to gather signatures from the public to force the measure onto the ballot. Opinion polls show most state residents oppose the idea, and reaction from lawmakers has been mixed.

If the lottery plan does not go forward, Schwarzenegger has proposed a 1 cent hike in the state sales tax. California already has the highest state sales tax rate in the country, at 7.25 percent, and many cities and counties impose local sales taxes on top of that.

Political Necessity

Though Schwarzenegger’s recent policy proposals have angered many conservatives in the state, at least one conservative political commentator grudgingly supports the borrowing plan.

“The solution to fixing the budget long-term would be to radically reform our spending habits. But given that this is an overwhelmingly blue state, Democrats will be Democrats and Republicans will be Democrats to a certain degree as well,” said Los Angeles-based columnist Christian Hartsock.

“As a conservative Californian, my default solution will perpetually be cutting gratuitous spending, but that would be a long-term rehabilitative process for California, and given the immediacy of our crisis and the nature of the alternative solutions, I stand behind the governor on this, hope he stands by his promises to balance the budget, and hope we don’t enable ourselves to reckless borrowing,” Hartsock said.

Spending Reductions Recommended

Schwarzenegger has been presented with billions of dollars’ worth of potential solutions from the California Performance Review, created four years ago in an attempt to prevent wasteful government spending.

The review consists of volunteers and state employees who suggest ways to reduce government waste, control spending, and boost the economic climate. The group has published its findings in four volumes, available online at

David Kralik, a political activist who lives in San Francisco, believes the governor ignored the ideas previously given to him.

“I think it’s a stupid idea,” Kralick said of the lottery borrowing proposal. “A good solution is to follow what was in the California Performance Review plan, two phone books’ worth of solutions that would save $18 billion.”

Risks School Funding Cuts

The Legislative Analyst’s Office (LAO) says the governor’s plan presents a “strong likelihood that distributions to public education from the lottery would fall well short of their current levels, perhaps by $5 billion over the next 12 years combined.”

Schwarzenegger’s plan relies on doubling lottery revenues from $3 billion to $6 billion annually over the next 10 years, which the LAO believes is too optimistic. State lottery officials in May reported sales were $275 million below projections for the fiscal year ending in June.

Under Schwarzenegger’s proposal, if lottery profits fall short of projections, bondholders would be allowed to tap education’s share of the money, forcing the state to dip into its general fund to replace the school money.

M.C. Armstrong, a filmmaker in Oxnard, California, recalled the California lottery was created in 1984 with the promise it would put money into the school system without raising taxes. He said the lottery as originally proposed “left everyone with a good feeling even if you didn’t win anything, since a state-mandated 35 percent of net profit went to the educational system.”

Armstrong added “those days are long gone,” as lottery revenues go to everything from lotto administration to remodeling state government buildings.

Krystle Russin ([email protected]) is a freelance writer in Austin, Texas.