With the N.C. lottery marking its one-year anniversary in March, the lottery’s executive director is already predicting that revenue devoted to education will be significantly less than state lawmakers appropriated in fiscal 2006-2007 budget.
Lottery proceeds are expected to fall short of General Assembly estimates by $75 million, according to Tom Shaheen, executive director for the N.C. Education Lottery. In the budget approved last session, lawmakers appropriated $425 million in lottery revenue to school funding, but Shaheen predicts that the lottery will garner $1 billion in total revenue by the close of fiscal 2007, providing $350 million for education beneficiary programs.
According to a NCEL press release in January, the numbers game took in about $670 million and paid out $298 million in prizes in 2006. In order to reach the estimated $1 billion revenue target, the lottery must generate $330 million in ticket sales between the first of the year and June 30, the end of the current fiscal year. Shaheen said that, given a shortfall, the $50 million in the Education Lottery Reserve Fund could be used to supplement the difference, leaving a deficit of $25 million.
The numbers game generated $233.1 million in sales during the first quarter of the current fiscal year, earning as much $8 million the first day that tickets went on sale, according to NCEL estimates. But since then, sales have been unable to keep pace with initial projections, despite the introduction of several new game formats in October.
Reasons for the shortfall
Shaheen said that online games — including Powerball, Carolina Pick 3, and Carolina Cash 5—are performing as expected. “It is the instant scratch-off games that are not meeting expectations,” he said. “Our players tell us it is due to the prize payout.”
Shaheen also suggested that high gasoline prices might be a factor in reduced ticket sales, according to the Charlotte Observer.
John Rustin, a lobbyist for the N.C. Family Policy Council, an organization that opposed passage of the lottery in the Assembly, said that one reason lottery earnings are less than anticipated is due to faulty revenue estimates drawn from neighboring states before passage of lottery legislation.
“If the estimates were drawn using revenue data from Virginia and Georgia without adjusting down for out of state purchases…then the numbers for North Carolina where overestimated, because when North Carolina got the lottery, we had no comparable non-lottery border state from which to draw revenue,” Rustin said.
Prior to approval of the state-sponsored lottery in August 2005, pro-lottery lawmakers and government officials touted the numbers game as a steady revenue source for education. In his 2003 State of the State address, Gov. Mike Easley emphasized that keeping lottery dollars in North Carolina would reduce class size, fund pre-kindergarten initiatives, generate $200 million annually for school construction, and create new jobs.
“When you are sitting here this year, struggling with the budget, just remember that your colleagues in 39 other states have a revenue source that you do not have,” Easley told lawmakers. “That makes it more difficult for you to improve education and keep taxes down.”
But Rustin said that initial estimates were inflated to make the numbers game appear more attractive. “Throughout the lottery debate over the past several years, the anticipated net revenue numbers offered by the governor and other lottery supporters continued to rise, seemingly without justification,” he said.
Despite past assurances that lottery funds would be used exclusively for education programs, government officials are also expected to use lottery proceeds to supplant about $200 million general fund dollars devoted to schools, according to February 2006 article in The News and Observer of Raleigh. Dan Gerlach, the governor’s senior policy advisor for fiscal affairs, told the N&O that the supplanted funds would still be used for education funding.
Are lottery funds helping?
On Jan. 23, the NCEL made its third payment for fiscal 2006-07 by transferring more than $75.3 million to the Education Lottery Fund. The Department of Public Instruction is responsible for allocating the funds to various education initiatives. The fiscal 2006-07 budget appropriated nearly $128 million in lottery proceeds for reducing class size, $84.6 million for pre-kindergarten programs, $170 million for school construction, and $42.5 million for scholarships for needy children.
DPI Director of School Support Services Ben Matthews, who is directly involved with overseeing lottery funds that are earmarked for school construction, said that NCEL has not informed him how close to the $170 million appropriation the actual lottery payments will be.
“It was very clear that we were going to have to have some flexibility in dealing with this because we weren’t going to know exactly what the lottery proceeds would be,” he said.
According to a preliminary facility needs survey prepared by DPI and the State Board of Education, about $9.7 billion will be needed exclusively for school construction over the next five years alone. Matthews said that while lottery proceeds are “a drop in the bucket statewide,” lottery money is still helping to fund capital construction.
“One thing that this lottery piece has done is give, for the first time in my life and I believe ever, a state stream of revenue for capital construction,” he said.
According to DPI’s 2006 lottery distribution chart, North Carolina counties received $38 million for school construction from the $95 million total payment made by the NCEL in October. Of the $38 million, nearly one-fourth is going to three of the state’s largest counties—Wake, $2.23 million; Mecklenburg, $4.35 million; and Guilford, $2.37 million.
Matthews said that it’s still too soon to tell how substantially lottery revenues are helping to meet education needs. “It may be a little early to predict how this will turn out,” he said. “I don’t know that truly we will experience a shortfall until we get through an entire year of dealing with this.”
David N. Bass is an editorial intern for Carolina Journal.