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The big focus of this year’s budget has been on a teacher pay increase and where to find the money to pay for it.  The Senate and the Governor took a more standard approach of using existing revenue and cutting some areas of state government to free up money for a teacher salary increase.  Last week the House released their budget and threw a curve ball into the budgeting debate — implementing an increased marketing plan for the lottery with the expectation it would generate more revenue that could pay for a teacher salary increase. 

Let’s start with the House’s plan and what they are changing to accomplish this goal of funding increased teacher salaries.  In FY 2013-14 the state used about $482 million from the lottery, of which $220 million was used for classroom teachers.  If everything is held constant, the lottery is expected to make around $489 million available to the state for fiscal year 2014-15.  That would keep the appropriations to each respective area of the state budget the same.  The House proposed doubling the lottery’s advertising budget from $17.5 million to $35 million, which the lottery commission expects would increase sales and result in more revenue available to the state, roughly $594 million.

That is not the only change the House is proposing.  It also wants to increase advertising restrictions on the lottery.  Those restrictions include requiring increased information about the probability of winning a prize, disclosing the value of prizes that can be won, and not allowing any advertising during high school or collegiate sporting events.  During a Senate Appropriations Committee meeting yesterday, the executive director of the NC Lottery, Alice Garland, expressed concerns about these new marketing restrictions.  She made the case that these new restrictions would hurt the lottery’s ability to market to large audiences (namely during prime time ACC basketball and football games) and would decrease the lottery’s ability to meet revenue projections when compared to existing advertising and marketing plans.  According to the lottery commission’s projection, revenue would decline by $47 million from the increased marketing restrictions, decreasing the overall revenue available to the state to use for teacher salary increases.

After hearing debate from many of the Senators during the committee meeting yesterday, it is clear that increased lottery funds will be used in some fashion to fund a teacher salary increase.  The question now is what level of dependency should be shifted to the lottery for a recurring General Fund appropriation?  

While more attention was put on the House’s use of lottery funds, the Senate also used increased lottery revenue in their budget.  The Senate budgeted an additional $56 million in lottery receipts to increase the lottery portion of classroom teacher funding from $220 to $276 million.  The House budgeted an additional $160 million for classroom teachers, $49 million for Pre-K, and almost $11 million for textbooks, bringing their total dependence on lottery money to $658 million, a $190 million increase from last fiscal year.

Legislators need to be wary of the projections assumed when budgeting recurring spending for something like a teacher pay increase.  The lottery is mostly funded through people’s discretionary income, so if a recession hits North Carolina in the next few years, the lottery will see decreased sales regardless of marketing efforts.  Another cause for concern is the source of lottery sales.  Evidence shows that lower income citizens tend to play the lottery with more frequency than those with higher incomes.  During a time when Medicaid reform is a top priority for state government, do we want to encourage these lower income citizens to spend their income on lottery tickets or use that money to climb the economic ladder out of poverty?

To be sure an overconfident prediction of lottery funds is not appropriated for recurring expenses, there are some metrics legislators should look into before agreeing on a number.  How many games are played, and what is the participation rate for each game?  More people play when the jackpot is over $200 million, so should the lottery should put more emphasis on large jackpot games over smaller ones?  Also, look at revenue collected over time.  The lottery was first implemented in 2005, so what impact did the 2008 recession have on the lottery, and how many years did it take for revenue to rebound from the recession?  Using the data we have available can help fiscal staff and legislators run multiple scenarios to ensure the funds used in the budget will still be available even in the case of another downturn.

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