The State Lottery Commission oversees the operations of a statewide lottery whose eight games generate more than $4 billion in business each year, with about $1 billion of its revenues earmarked for public education.  A five-member commission, appointed by the governor and approved by the state Senate, oversees the lottery’s management team and its business plan that sets goals and objectives each fiscal year. About 21,000 retailers sell lottery tickets in the state.

Lotteries were popular in the United States even before the states were united. All 13 colonies had lotteries to raise revenues, and proceeds helped establish universities like Harvard and Yale, and build churches and libraries. A $10 million lottery authorized by the Continental Congress helped pay for the war of independence.

Lotteries came under attack in the early 1800s. Increasing instances of fraud fed a moral fervor against what some considered an unacceptable gambling vice and by 1840 most states had banned them. A second wave of gambling popularity in general swept the country as it expanded westward and a lottery revival was sparked in the South as part of a rebuilding effort after the Civil War. But the pendulum swung back the other way and between 1894-1964, there were no legal government–sponsored lotteries in the country.  

In 1964, New Hampshire became the first state to sponsor a lottery, followed by New York in 1967 and New Jersey in1971. All attempts at a national lottery failed to pass Congress.

California was a latecomer to the lottery. By the time 58% of the electorate approved Proposition 37—the California State Lottery Act of 1984—19  states were already operating their own games.

The lottery act requires that at least 34% of lottery revenues go to public education. About half the revenues are returned to players as prizes and, when first approved, administrative expenses were capped at 16%.

Scratchers—tickets where you literally scratch off the numbers—was the first game offered when the lottery opened for business on October 3, 1985; more than 21 million tickets were sold the first day.  In its first nine months, players bought more than 1.7 billion tickets.  Scratchers were followed by a weekly lottery game that began October 14, 1986.  On June 22, 2005, California became the 12^th jurisdiction to join the multi-state Mega Millions game with its much bigger jackpots. First-year lottery ticket sales were about $1.8 billion and now total more than $4 billion with most sales coming from two of the lottery’s eight games—SuperLotto and Scratchers’ tickets.

In April 2010, the Legislature limited administrative expenses to $13% (instead of 16%) and gave the commission authority to increase the prize payouts.

History of Gambling in the United States (California State Library)

Lotteries (California State Library)

How the Lottery Began (Lottery website)

California Lottery Act (Lottery website) (pdf)

The California Lottery Commission is a five-member board, appointed by the governor, which annually selects its own chairperson. At least one of the members must have five years experience in law enforcement and at least one must be a certified public accountant. The commission is required to make quarterly reports on lottery operations to the Legislature, the governor, the attorney general, the controller and the treasurer. The governor appoints a director, who manages the day-to-day operations of the lottery.    

The commission operates eight different games. MEGA Millions, SuperLotto Plus, Scratchers, Fantasy 5, Daily 4, Daily 3, Hot Spot and Daily Derby.

The commission’s Security and Law Enforcement Division investigates lottery-related violations of law; establishes security systems for game operations; determines ownership of tickets in question; investigates internal security violations; conducts background checks on lottery employees, retailers and contractors; communicates with other law enforcement organizations; and provides a loss-prevention program for retailers.

The commission headquarters are in Sacramento, but it has nine district offices located in Sacramento, San Francisco, Hayward, Fresno, Van Nuys, Santa Fe Springs, Santa Ana, San Bernardino and San Diego with sworn and non-sworn law enforcement personnel.

The commission operates a toll-free hotline for people who believe they have been a victim of a scam and posts security videos of suspects of fraud or other lottery-related crimes.

The lottery commission issues an annual report to the public in addition to a financial report.

California State Lottery Act of 1984 (FindLaw)

Lottery Regulations (Lottery website) (pdf)

After prize winners get their loot, the money goes to education. Since lottery sales began in 1985, public education has received more than $24 billion. By law, at least half of all lottery revenues are returned as prize money to players and at least 34% goes to schools.

As of June 30, 2011, the lottery had paid out $34.1 billion in prizes; $4.3 billion in retailer compensation; $1.5 billion in direct costs; $3 billion in operating expenses.

The lottery commission does not receive any money from the state General Fund to run the games; all of its operating expenses come from ticket sales, which were around $4.1 billion in fiscal year 2011-12.  

Of that amount, nearly $2.4 billion was returned to players as prize money, $1.2 billion went to education, $357 million was spent on game costs (mostly to retailers) and $174.6 million covered operating expenses (including salaries). Unclaimed prize money is given to education and, although it rarely exceeds 2% of revenues annually, schools picked up more than $700 million during the lottery’s first 25 years.

The education money was distributed as follows: $930.9 million to K-12 schools; $178.6 million to community colleges; $47.8 million  to California State University/California Maritime Academy, $32.9 million for University California; $180 million for other public colleges and universities; and $837 million for other educational institutions.  

Originally, the California State Lottery Act of 1984 capped administrative expenses at 16% of sales and required that 34% of sales go to education and, as nearly as possible, 50% of revenues be returned to prize winners. On April 8, 2010, the Legislature amended the act, holding administrative costs to 13%.

According to the lottery act, funds going to education cannot be used for acquiring property—only for instructional purposes. Institutions receiving money aren’t required to report precisely how they spent it, but a state Department of Education survey in 2006-07 indicated that 61% went to instructor salaries and benefits and 24% went for classroom materials. 

3-Year Budget (pdf)

Contribution to Education (Lottery website)

California State Lottery 2010-2013 Business Plan (Lottery website) (pdf)

Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2011 (Lottery website) (pdf)

AB 142 Bill Analysis (Little Hoover Commission)

Report on Use of Lottery Funds on Kindergarten thru 12^th Grade (Little Hoover Commission) (pdf)

Privatizing the Lottery

Camelot Group, operator of the United Kingdom’s national lottery and a consultant to the California lottery since 2009, made a pitch in November 2011 to manage the state’s lottery sales and marketing. Camelot, saying it could generate higher ticket sales and bigger profits, reportedly offered an upfront fee of $1 billion to snare the contract.

The lottery has been criticized in the past for not reaching its revenue potential. And with the state’s economic woes, cash-strapped schools continue to rely to some extent on money from lottery sales. In fiscal year 2009-2010, the lottery provided  1.2% of all K–12 funds, according to the independent Legislative Analyst’s Office.

While 2010 changes in the state Lottery Act led to an increase in lottery sales, which had been declining prior to the bill’s passage, California still lags in ticket sales on a per-capita basis.  According to the nonpartisan Tax Foundation, the average Californian spent $84 on lottery tickets in 2008, while the average per capita for all states was $199.  Rhode Island came in number one with a per capita average of $2,275.

This is not the first time the state has considered privatizing all or part of the lottery.

In 2007, Governor Arnold Schwarzenegger advocated privatizing the lottery. Wall Street investment firms like Goldman Sachs were tossing around numbers like $37 billion as possible one-time payoffs to the state in exchange for long-term leases. In addition to California, other big states like Texas, Illinois and Florida were said to be considering deals. The Goldman Sachs sales pitch to the California Department of Finance was made by Kathleen Brown, former state treasurer and brother of the former and future governor Jerry Brown.

After due consideration, Schwarzenegger hired former junk bond king and convicted felon Michael Milken to review his proposal, a move that garnered the support of California Assembly Speaker Fabian Nunez. “Michael Milken and the Milken Institute have a sterling international reputation for their work, and the people of California will benefit greatly from their review of this project,” the speaker said.

But the idea was shot down when the U.S. Department of Justice ruled that states could not privatize their lotteries beyond letting companies have a minimal interest in their profits and losses. Although many thought that ruling might end talk of  privatization, within a year Illinois inked a 5-year, $4.8 billion contract with Northstar Lottery Group to take over management of its lottery. 

Camelot’s proposal, like the Illinois deal, is considered permissible because it revolves around a management contract, not ownership or a lease.

Recommendation on Hiring Camelot as Consultant (pdf)

British Firm Seeks to Manage California Lottery, Boost Sales, Profit (by Dale Kasler, Sacramento Bee)

Milken to Review Lottery Proposal (by Dan Smith, Sacramento Bee)

State Lottery Sales Per Capita, Fiscal Year 2008 (Tax Foundation)

Some States Consider Leasing Their Lotteries (by Nelson D. Schwartz and Ron Nixon, New York Times)

Annual Privatization Report 2010 (Reason Foundation) (pdf)

Should California Privatize the State Lottery? (California Budget Project)

Online Lottery

Federal authorities cracked down on illegal online gambling in 2011 using a controversial 5-year-old law—the Unlawful Internet Gambling Enforcement Act—to shut down online poker companies, arrest their owners and send more than a shudder through the gaming industry.

“This is seismic. It’s a game changer,” said James Kilsby, an editor for Gambling Compliance, a publication that covers regulatory issues. The move by the federal government reinforced legal restrictions on internet gambling that forbid it reaching into states that have not themselves approved it. With the emphasis on legal online gambling shifting to the states, those with lotteries looked on with bated breath until a few months later the U.S. Department of Justice  issued a legal opinion allowing the sale of lottery tickets online. The opinion said the Wire Act of 1961 only applied to sports betting and the states were free to put the lottery on the internet.

“It does open up a major potential channel for lottery sales in California,” said California lottery Director Robert O’Neill, who added that security of online ticket sales was the main issue facing the state. The state would also be looking at other forms of online gambling down the road, he said. 

Eleven Charged in Federal Crackdown on Online-Poker Companies (by Alexandra Berzon and Chad Bray, Wall Street Journal)

California to Explore Online Sales of Lottery Tickets (by Jim Puzzanghera, Los Angeles Times)

Borrowing Against the Lottery

When Californians approved the lottery at the ballot box in 1984, the law was specific about who should receive the benefits: 50% of revenues would be distributed as prizes, 34% would go to public education and 16% would pay for operating expenses.

So when Governor Arnold Schwarzenegger proposed in 2008 borrowing $15 billion against future lottery earnings to help balance the budget, he encountered staunch resistance. Lawmakers denounced it as a gimmick and one pollster, Independent Lottery Research (ILR), said voters were emotional about what they considered their personal lottery and were as eager to offer opinions on the subject as sex. “Everyone thinks they have some ownership of the state lottery,” said ILR Director Michael Jones.

“They don't see it as money to move around and use for other purposes,” said Public Policy Institute of California President Mark Baldassare, even when the alternative might be higher taxes. Governor Schwarzenegger thought otherwise. “There are some people who say this is exotic, this is gimmickry,” Schwarzenegger said. “There is nothing gimmicky or exotic about it. . . . This is the direction to go, because we don't want to raise taxes.”

Schwarzenegger’s plan assumed that the lottery—which earned about $1.2 billion a year in profit for schools and increased about 4% a year—would see its sales and profits double within five to 10 years, but the independent Legislative Analyst’s Office said the governor was making “unobtainable assumptions about the ability of the lottery to increase its profits.”

Proposition 1C, which authorized borrowing $5 billion against future lottery profits, was put on the May 2009 ballot by the Legislature and was defeated, receiving only 36% of the vote. 

Legislative Considerations Regarding Changes to the Lottery (Legislative Analyst’s Office)

Overview of the 2008-09 May Revision (Legislative Analyst’s Office) (pdf)

Gov.'s Plan Faces Rocky Path (by Evan Halper, Los Angeles Times)

California Voters Kill Budget Measures (by Eric Bailey, Los Angeles Times)

GTECH Corp.

GTECH Corp. has been the California lottery’s primary vendor since 1986. But its dominant position in the state hasn’t always been secure.

Shortly after Governor Pete Wilson took office in January 1991, GTECH, then a fast-growing Rhode Island computer company, hired public relations specialists Spencer/Roberts. The company, in turn, hired Marty Wilson, who had been Governor Wilson’s deputy chief of staff. Another GTECH lobbyist hired Joseph Rodota, a former adviser to the governor’s transition team when he first took office. One of Rodota’s projects was making the case for easing restrictions on jackpot winners who had been delinquent making child support payments.

GTECH’s initial contract was expiring and lottery Director Chon Gutierrez, a holdover appointee of Governor George Deukmejian and GTECH critic, was pushing for an open,  competitive bidding process, but by September he was replaced by Sharon Sharp. Rodota, now a GTECH lobbyist, had been instrumental in her selection.

In November 1991, state Senator Alan Robbins admitted he had accepted a bribe from GTECH lobbyist Clayton R. Jackson, and announced he would plead guilty to corruption charges and resign his seat. GTECH was not directly implicated, but Governor Wilson’s chief of staff, Bob White, warned various Wilson confidantes not to lobby for GTECH.

Rodota and Marty Wilson severed their ties with GTECH’s lobbyists, but a year later another former aide to Governor Wilson, appointments secretary Terrance Flannigan (who had resigned in September 1991) formed a lobbying firm with his brother and signed up to represent GTECH. Flannigan had also played a role in hiring Sharp as lottery director.

Rodota then returned to government as Governor Wilson’s Cabinet secretary just before GTECH signed a $400 million contract with the state that competitors said had been structured to favor the company’s bid. A task force was appointed to look into the contract award, but meanwhile Director Sharp proposed that the company be given an additional $23 million no-bid contract. The lottery commission balked and opened the bidding after word circulated that two lottery officials had discouraged another company from bidding.

In October 1993, during the corruption trial of lobbyist Jackson, an audio tape was played  of him rejoicing at the release of Director Gutierrez and referring to Sharp as “our gal.”

Sharp resigned three weeks later.

Three years later, an investigation of lotteries by Fortune magazine acknowledged that GTECH was the lottery industry leader and had helped make the games “modern, efficient and hugely lucrative.” The magazine also credited the company with another distinction:

“Rare is the company that has faced as many allegations of baldly sleazy conduct as Gtech. Most recently, early this October, in a federal courtroom in Newark, New Jersey, the company's former national sales manager, 49-year-old J. David Smith, was convicted of orchestrating a kickback scheme using inflated payments to state-level political consultants. The conviction brought down a man who almost single-handedly led Gtech to its current position, even as the whiff of scandal seemed to follow his every step.”

Controversy Takes Its Toll on Lottery Commission (by Virginia Ellis, Los Angeles Times)

Illinois Former Lottery Chief Again Under Fire (by Hugh Dellios, Chicago Tribune)

Favoritism Worries Put Sharp in Hot Seat (by Daniel M. Weintraub and Virginia Ellis, Los Angeles Times)

GTECH Signs Five-Year Extension with California Lottery (Casino Enterprise Management)

The Numbers Crunchers (Fortune Magazine)

Lottery Bonds

When Governor Arnold Schwarzenegger proposed privatizing the lottery in 2007, state Treasurer Bill Lockyer prepared an analysis that showed California could make more money by simply issuing bonds backed by lottery revenues. These bonds, which would be used for capital projects such as school and university buildings, would be backed by future lottery sales.  The lottery would remain under state ownership and management.

A downside, according to some, is that the funds could be used for other purposes besides education including funding health care or retiring state debt, which might be anathema to some who could view this as a subtle tax increase without really calling it a tax increase.

Although Oregon, Florida and West Virginia issue lottery bonds, voters in California weren’t keen on the idea in 2009 when they overwhelmingly voted 64%-36% against Proposition 1C, which authorized borrowing $5 billion against future lottery profits. 

California Lottery Debate (by Rich Saskal, The Bond Buyer)

California Voters Kill Budget Measures (by Eric Bailey, Los Angeles Times)

Legislative Considerations Regarding Changes to the Lottery (Legislative Analyst’s Office)

Initial Examination on Reforming the California Lottery (By Kevin Klowden and Anusuya Chatterjee, with Anita Charuword and Benjamin Yeo, the Milken Institute)  (pdf)

Powerball

California has been a member of the Mega Millions consortium since 2005, which lets its lottery players participate in a game that stretches across multiple states and produces bigger jackpots. Until 2009, if a state wanted to participate in a multi-state game, it had to choose between Mega Millions and its competitor, Power Ball. Both games have produced jackpots of more than $300 million, although Mega Millions owns the record of $390 million.

Each game has a large and fervent fan base and in January 2010 an agreement between the two game operators permitted states to sign up for both. Many states did, but not California. But in August 2011, lottery spokesman Elias Dominguez said the state was considering adding Powerball. California is the only Mega Millions state that doesn’t offer Powerball, and Florida is the only Powerball state that doesn’t offer Mega Millions.

California Lottery Considers Joining Powerball (by David Siders, Sacramento Bee)

Why Lotteries?

Although government sanctioned lotteries have been around in the United States since colonial times and their popularity has waxed and waned, the debate over the wisdom of having them has never ceased.

Good Idea? You Bet

Many people like to gamble and even those who view gambling as a vice best avoided generally admit that lotteries are about as benign a form of gambling as one can find. When given an opportunity to vote for establishing a lottery, state voters inevitably vote yes. Lotteries are a social and cultural phenomenon that offers a shortcut to the American Dream of wealth and prosperity while providing a public good in lieu of taxes.

Some supporters of lotteries maintain that they undercut illegal forms of gambling, like the infamous numbers games run by mobsters. Others argue that those who get to exercise their gambling urge with a Scratcher purchase are less likely to risk the mortgage money playing illegal online poker.

Lotteries are indisputable money makers for the state. California pours $1 billion a year (more than a third of its lottery revenues) into education as a result of lottery sales and the potential benefits are even higher. Half the revenues from lottery ticket sales are returned to players in the form of prize money.

It’s cheap entertainment, often shared by friends and fellow employees who regard it as a social occasion that holds out the promise of fame and fortune. Although the odds of winning are low, players nonetheless manage to harmlessly indulge their fantasies.

Modern lotteries are for the most part scandal free and offer opportunities for government and private enterprise to join in common cause for the greater good. They remove a layer of hypocrisy from society by acknowledging human behavior without vilifying it.

No harm, no foul, no debate.

Gambling is a Vice, Not a Virtue

There is a difference between tolerating a societal behavior in the name of freedom, and having the state promote it on billboards and television commercials.

What does it say about a society whose government can’t ask its citizens to properly fund education simply because it’s the right thing to do, and instead, to fulfill those obligations bribes them with an unlikely opportunity to get rich by indulging a vice? That is an odd way for the state to protect the public welfare.

Supporters of the lottery often point to the earmarking of funds for special purposes, such as education, as a benefit of the system. But this earmarking doesn’t necessarily result in more money for the beneficiary. States can, and do, reduce the amount of money they appropriate from the general fund for specific expenditures when lottery money is there to make up the difference. At best, it increases the amount of discretionary funds available to lawmakers, which may account for the popularity of lotteries among legislatures.

Lotteries are, in effect, regressive forms of taxation because lower-income people pay a higher percentage of their wealth funding them. A 1999 study out of Duke University found that the top 20% of players (who spent $1,619 or more) accounted for 82% of the action and that “males, blacks, high-school dropouts, and people in the lowest-income category are heavily overrepresented among those who are in the top 20 percent of lottery players.”

Once established in a state, lotteries invariably expand their appeal by offering a variety of games with tantalizing come-ons. California offers eight different games, including one with a possible payoff of more that $300 million to a single winner.

Opponents of lotteries argue that gambling, even the most benign forms, are addictive and have unintended consequences. Some experts in addiction regard lotteries as gateways to other forms of gambling whose consequences aren’t nearly so benign. And it’s a gateway that opens early in life. A 1999 Gallup poll found that 15% of youths aged 13-17 had purchased a lottery ticket in the previous year. A survey that year in Massachusetts found that 47% of seventh-grade students had played the lottery and other subsequent studies found similar results.

While buying lottery tickets as a group can be a binding activity in the workplace, it can also be divisive and stressful. Those people who choose for one reason or another not to play the game are de facto outsiders among their co-workers, even without a winning ticket. With a winning ticket, those who chose not to play aren’t likely to be a happy lot.

Should National Lotteries be Abolished? (by Alastair Endersby, International Debate Education Association)

Californians Keep Playing Lottery Even after Losing Job (Sacramento Bee)

Should Workplaces Ban Lotteries? (Green Conduct)

Lotteries (California State Library)

The Effects of Lotteries (Library Index)

Lotteries (The Frontal Cortex)

State Lotteries at the Turn of the Century (by Charles T. Clotfelter, Philip J. Cook, Julie A. Edell and Marian Moore, Duke University) (pdf)

Linh Nguyen, 2010-2011 (acting)

Joan M. Borucki, 2006-2010

Chon Gutierrez, 2004-2005

Anthony Molica, 2003-2004

Joan Wilson, 2000-2003

Eugene Balonon, 1998-1999

William Popejoy, 1997-1998

Maryanne Gillard, 1996-1997

Adelbert Pierce, 1993-1996

Sharon Sharp, 1991-1993. Sharp resigned during a controversy over her dealings with GTECH Corp., a company that processes lottery contracts. She was accused of favoritism after the company was the only bidder on a $400 million contract; later, it was awarded a $23 million no-bid contract. Sharp was embroiled in a similar controversy, concerning the same company, when she worked at the Illinois lottery. She resigned her California position two weeks after an audio tape of a GTECH lobbyist referring to her as “our gal” was played at his criminal trial.

Chon Gutierrez, 1987-1991

Mark Michalko, 1985-1987

Howard Varner, 1984-1985