Education Lottery

The North Carolina Education Lottery was born of corruption, from its inception as a bill, to its lobbying, to its rushed enactment in the N.C. House and Senate in the face of the state's constitutional requirement that revenue bills face multiple votes on successive days, to its false promise to and exploitation of the state's poorest citizens.

Lotteries Lead to Lower Per-Capita Spending on Education

At the request of the North Carolina Legislative Black Caucus' Economic Development Committee, the Office of State Auditor conducted a performance audit of the lottery, released April 10, 2008, which "identified significant performance management weaknesses ... no documented revenue forecasting methodology, no strategic plan, no ongoing market research, and no full-cost accounting of promotional events."

The audit's finding of a lack of performance methodology cuts to the very heart of the lottery's ostensible purpose. As stated in the audit, "It is important to develop a reliable revenue forecasting methodology because schools and students were promised Lottery receipts for new construction, class size reduction, and scholarships."

Nevertheless, lottery sales and education transfers for 2007 fell short of projections by more than 25 percent, and despite projections being set about 20 percent lower apiece for 2008, by mid-year lottery sales and education transfers were still trending below expectations.

These shortfalls are exacerbated by appropriation replacement — an inevitable byproduct of state lottery revenue schemes whereby the new funding from the lottery replaces rather than amplifies state appropriations for, in this case, education.

There's an old principle that governments raise taxes not to support key functions, but to support the most trivial ones — i.e., ones that lawmakers would cut in the name of efficiency and good government, but decide to keep in the name of higher taxes. The wisdom of this observation is illustrated to absurd extents by appropriation replacement, as funds that once would have gone to education now find their ways into various other public programs, liberated, as it were, by the lottery revenue.

The replacement problem first raised its head in North Carolina in early 2006, when The News & Observer reported that lottery revenues would supplant more than $200 million in general funds devoted to schools. It turned out that the original bill included language intended to prevent new lottery proceeds from replacing existing school revenue, but that language was dropped from lottery provisions in the state budget bill (not that legislation could effectively stem the replacement problem, owing to the fungibility of money).

Older state lotteries begin to compound the problem of supplanting through something lottery researchers have termed lottery fatigue. Numerous studies have shown that state lottery sales almost always fall after the first few years. Lottery proceeds flatten not only because their novelty fades, but also because residents initiated into gambling branch out into other forms of gambling, including online gambling and anything offering quicker payoffs than lotteries.

In the long run, studies have shown, lottery states are left with lower per-capita spending on education than states without lotteries. This is the next step for N.C.'s lottery.

Moral Problems

Studies have repeatedly found another undesirable byproduct of state lotteries: by far the biggest purchasers of lottery tickets are the poor, minorities, elderly, and high school dropouts.

This is not unknown to state lottery commissions; indeed, more lottery advertisements and sales outlets target low-income neighborhoods, even as revenue from those sales generally support wealthier students. As lottery fatigue sets in, that problem exacerbates, as lottery commissions spend more money on advertisements.

This problem is also infesting North Carolina's lottery. A JLF study last year found that the best predictors of a county's lottery sales to adults 18 or older were its poverty rate, property tax rate, and unemployment rate (see chart below).

Beyond taking advantage of the poor to raise revenue, which already offends the mores of many concerned North Carolinians, the lottery also keeps the state in the position of endorsing and promoting an activity that many of its citizens believe is immoral.

One need not oppose legalized gambling to oppose a state lottery. At least privately operated casinos, horse tracks, or friendly poker games do not implicate government officials in swindling anyone, and have the virtue, unlike a government-monopoly lottery, of offering choice and competition to improve the odds of winning.

Moreover, at least with horse racing there is the potential for rural communities in North Carolina to expand their horse breeding and training industries.

Another concern has to do with children and families. Lottery advertisements by design constitute a massive effort to communicate what would appear to be a government-approved message to young people that the way to get ahead in life is not to study and work hard, but to gamble.

For the vast majority of people, this message offers a false hope and, if heeded, could result in significant harm. It also clashes in a fundamental way with what most North Carolina parents seek to teach their children.

Recommendations

1. End the North Carolina Education Lottery. Its origin is suspect, its performance is subpar, its history is doubtful, and its manifold negative effects are sure.

2. If that is not feasible, then end the lottery as it is and consider legalizing other forms of gambling that can then be taxed. This option would remove the state from endorsing and promoting an activity many North Carolinians find immoral, let alone counterproductive to the responsible message that society rewards education and hard work. It would also end the exploitation of the poor and allow for new industries (horse breeding and training, for example) to build within the state.

3. If that is not feasible, then end the lottery as it is, then recraft and pass a lottery bill the right way, in accordance with the state Constitution. The next recommendation will offer a reform for the lottery formula also worth considering here.

4. If ending the lottery is not feasible, then at least pass legislation that puts lottery proceeds to proven good uses of education money. The current lottery formula places much greater emphasis on class-size reduction and pre-kindergarten programs — programs the state's own assessment has found haven't improved students' performance.

A reformed lottery formula would focus especially on construction (with emphasis on high-growth school districts) and also include funding for charter schools and incentives programs to reward school districts and administrators who find innovative, low-cost solutions to facilities needs.