February 1, 2011

Click here to view and here to listen to Jon Sanders discussing this Spotlight report.

RALEIGH — North Carolina’s government-run lottery gets most of its money from the state’s poorest counties, while failing to provide a promised boost in funding for education. A close look at the numbers leads to a simple conclusion in a new John Locke Foundation Spotlight report.

“The clearest and best solution is to eliminate the state lottery now,” said report author Jon Sanders, JLF Associate Director of Research. “End the lottery, and return to a more honest, direct form of education funding. The state lottery has not become an irreplaceable funding source during the short years of its existence.”

While scrapping the lottery is the best option, lawmakers who want to keep the state-run game should at least make changes to ensure its proceeds are used more effectively, Sanders said. He also recommends deregulating gambling.

Lawmakers created the N.C. Education Lottery in 2005. Its first games started the next year. North Carolina’s lottery appears to be following a familiar pattern, Sanders said.

“The lottery was sold as a way to boost education spending in North Carolina, but that historically has been a false promise of education lotteries in other states,” he said. “A study of 11 other state education lotteries showed that states are likely to decrease their growth of spending for education upon operating a lottery designated for that purpose.”

“This decrease occurs regardless of the revenue generated by the lottery,” Sanders added. “Meanwhile, states without lotteries maintained and increased their education spending more than states with lotteries.”

An examination of North Carolina’s numbers shows this state following the general trend, Sanders said. “Plus the problem of lottery funds replacing general revenue rather than adding to education spending has overtly dogged the N.C. Education Lottery from the onset. Before the first ticket was sold, then-Gov. Mike Easley announced that half of the earliest lottery proceeds would replace current education spending. His successor, Gov. Bev Perdue, openly transferred lottery money to the state’s General Fund in 2009.”

“That same year, some state legislators determined that the problem was so bad that they sponsored legislation to remove ‘Education’ from the lottery’s official name out of concern for truth in advertising,” Sanders added.

With the state facing a structural deficit of 17 percent of the General Fund, Sanders’ report does not argue in favor of increasing education funding by rote. “Plenty of evidence suggests that other options are better than a simple strategy of throwing more money at schools,” he said. “This report simply tests the lottery’s performance against the promises its advocates have made.”

The lottery gets most of its money from people who are least likely to be able to afford the game, Sanders said.

“Previous research showed high unemployment and poverty rates to be great predictors of a North Carolina county’s lottery sales,” he said. “Data for 2009 confirm that trend. The statewide average of lottery sales per adult was $180. In the most economically distressed counties, where the average poverty rate was a whopping 20.3 percent, the lottery sales figure was $211 per adult. The least distressed counties posted a number of $159.”

The top 10 counties in lottery sales had an even higher poverty rate (22.8 percent), Sanders said. They also had higher unemployment, lower incomes, and much higher property taxes than the respective state averages.

Because of prizes and overhead costs, only a portion of that money even has the chance to be funneled toward education. “The state has erected a very costly system of capturing money from citizens that converts a rather small portion of it into education funding,” Sanders said. “Once you account for supplanting of lottery dollars for General Fund dollars, the lottery is essentially an expensive machine to raise money for various public programs outside of education.”

If lawmakers want proceeds from gambling, deregulation is their best option, Sanders said. “Deregulation would allow gambling industries to develop and compete in the state, contributing to job creation and tax revenue for the General Fund,” he said. “It would remove the state from being the only seller of gambling-related materials, which is no worthwhile role for any government to have.”

Short of eliminating the lottery or converting to deregulated gambling, lawmakers still could use lottery dollars more effectively, Sanders said. Half of the current lottery education dollars now head to class-size reduction and the More at Four pre-kindergarten program, 40 percent of the money heads to school construction, and 10 percent goes to college scholarships.

“Lawmakers could eliminate funding for class-size reductions and More at Four, neither of which has been shown to improve students’ academic performance,” he said. “Increase funding for school construction, and fund school construction cost-saving incentives. Lawmakers also should provide funding for all public schools, including charter schools.”

“Doing absolutely nothing about the lottery would be the worst of all possible outcomes,” Sanders added. “It’s a poor bet for this state.”

Jon Sanders’ Spotlight report, “Just Not Worth the Gamble: The NC Education Lottery’s many problems have a common solution,” is available at the JLF Web site. For more information, please contact Sanders at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].