Are Lottery Bonds a Good Bet?

Lawmakers upped the ante on Proposition 1C today. February’s budget deal assumed $5 billion in proceeds from the sale of lottery bonds would help close the 2009-10 budget gap, but lawmakers are contemplating raising that figure to $10 billion.

The bet that voters are being asked to make on Proposition 1C is whether California can dramatically increase lottery sales. However, recent declines in California lottery revenues reflect trends in other states and may cause bond investors to hesitate. California lottery revenues fell by 7.4 percent in 2006-07, by 8.1 percent in 2007-08, and by 6.7 percent in the first six months of 2008-09. In 2008-09, per capita lottery sales fell in 17 of the 43 states with lotteries, and average per capita lottery sales in states with lotteries west of the Mississippi River decreased by 2.4 percent.

The decline in lottery sales mirrors a national trend of slower growth in gaming revenues: horse racing wagers in the US declined by 10.1 percent from $15.2 billion per year in 2003 to $13.6 billion in 2008 and gaming revenues in Nevada decreased by 1.9 percent in 2007-08 and by 14.0 percent in the first six months of 2008-09.

Declines in California lottery and national gaming revenues may cause investors to demand higher rates of interest to purchase lottery bonds. This increased cost of borrowing would mean a greater share of each lottery purchase would go to pay back investors. If this were to occur, the state budget would be less likely to benefit from lottery sales – a selling point for Proposition 1C proponents. Indeed, as the interest rate paid on lottery bonds increases, the chance that the state budget would receive dollars from the purchase of a lottery ticket becomes a much riskier bet.

For more information on Proposition 1C, see the CBP’s analysis here.

— Jonathan Kaplan