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Is There Hope for "HOPE"
Friday, 07 January 2011

January 7--  Senator Jack Hill of Reidsville provides some insight into the revenue dilemma facing the state's lottery-funded HOPE scholarship program in his weekly "Notes From the Senate" report.



There are three numbers that keep those of us concerned about the future of our lottery programs up at night: 1.12, 883, and 2012.  1.12 is the amount in billions that we project to spend on lottery funded programs this year.  883 is the amount in millions that the Georgia Lottery Corp transferred to the state (known as lottery proceeds) to fund the programs. The gap between the two numbers is being covered through the use of lottery reserves. 2012 is the year the unrestricted lottery reserves will dry up if no program changes are made.


Most of us wish that we would not have to make changes to these successful lottery funded programs, but simple economics has forced lawmakers to the realization that we cannot continue to spend more than we receive.  When lawmakers convene next month, one of the biggest challenges they will face is how to restructure the programs so that they are sustainable not only now, but for many years to come.  In the next few weeks I want to explore the trends of lottery funded programs and possible options for restructures.  I want to state from the beginning that these are not necessarily my recommendations, but options that everyone should be ready to consider.


Increasing Revenue- Two Ideas


●     Increase Lottery Proceeds- Since 2000, lottery ticket sales have grown 58%.  The amount awarded in prizes has jumped 70%.  The amount paid out in salaries and benefits rose 54%.  Lottery proceeds however only grew 28% over this time.  In 2000, for every $1 in ticket sales, 30 cents went to the state.  This return has steadily declined so that in 2010 we are only getting 24 cents for every dollar of sales.  Lottery officials will argue that the market is saturated and bigger prizes are required.  I agree with them to some extent.  But I believe that we are too focused on increasing sales and not enough on the point of the lottery, the amount transferred for education.  In 2009, the state paid out $99 million more in prizes than in 2008 but only received $4.3 million more in lottery proceeds.  This means we received only 4 cents on the dollar in additional lottery proceeds for every extra dollar in prizes.  Any way I slice the data, I cannot find any correlation between the level of prizes (and salary expense for that matter) and the level of lottery proceeds.


According to data gathered by the North American Association of State and Provincial Lotteries, the national average is 30 cents for every dollar of sales.  Georgia ranks number 6 in the country in terms of sales but 38th in the percent transferred to the state.  Texas has a similar $3.7 billion in sales compared to Georgia's $3.6 billion but transfers a whopping $1.1 billion or 29% for state uses.  A discussion needs to be had about maximizing the amount transferred to the state, not just ticket sales.  Salaries and bonus for lottery executives should also be reoriented toward this pursuit.  We will not cover our deficit solely through transferring more, but it isn't unreasonable to expect transfers to increase by $50 to $100 million.     


Even if the Lottery Commission started increasing transfers by 1% per year pointing towards 30% in 5 or 6 years, this would be a huge contribution to meeting the growth of HOPE and other programs.


●    Remove the Sales Tax Exemption- Currently lottery tickets are exempt from state and local sales taxes.  Eliminating the exemption would bring in an estimated $130 million to the state general fund.  Critics will argue that sales will decline, but lottery falls in the category of goods that do not have significant price sensitivity. If lottery sales are topping out anyway, then isn't it worth a reduction in sales to increase the amount education will receive?




Pre-K - 31% of Lottery Expenditures

Georgia's Pre-K program has seen manageable growth primarily because the legislature only expands the number of slots available when the state can afford it.  Currently the state has 84,000 slots open and pays around $4,200 per slot (In 1994, the state paid out a comparable $4,253 per slot).  Options for this program are limited. 

●     Place Public Pre-K in the QBE formula- According to the Fiscal Research Center at Georgia State University http://aysps.gsu.edu/frc/files/Rpt_215FIN.pdf), 11 states used their state funding system to fund their Pre-K program.  37 of the 40 states with a Pre-K program rely on their general fund to some extent to pay for their program.  Each of these scenarios would require a law change but the bigger question is whether we can afford to take on this program with the budget being so tight.  The role of private providers in this scenario would also have to be considered but separating the two programs would be a possible short-term solution. 


●     Private Pre-K Program -Establish Sliding Scale Fee- In anticipation of changes being made, the Senate requested the Department of Audits to break down the income demographics of families participating in the Pre-K program.  Please note that confidentiality laws only allowed us to see the results in aggregate.  The analysis covered 2 fiscal years and revealed that 36% of households with Pre-K students had an Adjusted Gross Income (Salary minus deductions like mortgage interest, 401k, etc) of less than $20,000.  67% of the households have an AGI of less than $40,000.   80% are under $60,000.  According to the Department of Early Care and Learning, approximately half of the recipients in the program receive some sort of assistance from the state (Medicaid, Food Stamps, TANF, etc).  I mention this because any sliding scale that excludes low income families will not return more than $10 to $20 million at the most.  This isn't pocket change and not the only solution, but it seems to me, if families can afford to pay a fee, they should.


Technical College HOPE Grant - 18% of Lottery Expenditures - The HOPE Grant has exploded in the past 10 years.  In FY2000, 146,477 HOPE Grants were awarded.  By FY2010 this amount has nearly doubled to 299,502.  Over this time period, HOPE grant expenditures have jumped 352% reflecting not only the population increase but the 117.4% rise in tuition.  This trend is only expected to increase.  According to Community College Week Magazine, half of Georgia's technical colleges were ranked among the nation's fastest growing two year colleges.  This program is regarded as a workforce development initiative and we should not detract from that.  But means testing and moving to a more structured merit based system (currently participants only have to have satisfactory progress, not the 3.0 GPA that HOPE Scholarship recipients must retain) might be the only way to save this program while keeping job creation as its focus.  Under the present structure, a college graduate can attend a technical school tuition free.


NEXT WEEK:  Ideas on retaining the Tuition-free HOPE Scholarship


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