Illinois Governor Plans to Fund Education with Lottery Proceeds

Gov. Rod R. Blagojevich recently proposed to increase state funding for education over the next four years through the sale or long-term lease of the state lottery. 

The lottery currently produces an annual revenue flow of $650 million for education. Governor Blagojevich’s proposal assumes that the sale or long-term lease of the lottery would raise $10 billion; $6 billion above current state funding levels would be spent on education over the next four years in increasing increments of $1 billion in year 1, $1.35 billion in year 2, $1.65 billion in year 3, and $2 billion in year 4. The balance of the proceeds would be invested to ensure that the annual revenue flow for education would return to its current level of $650 million from year 5 until 2025. Revenue from the lottery would cease after 2025.

Governor Blagojevich would use the substantially increased revenue available over the next four years to increase the state’s per-pupil funding (the foundation level), increase special education services, fund school construction, expand preschool to all 3- and 4-year-olds, expand programs for underperforming students, replace textbooks, and pay for other reforms. The governor’s proposal also calls for saving money through school district consolidation and increasing merit pay programs for teachers.

Many questions have surfaced about the governor’s plan. The biggest questions are how improvements will be maintained after the next four years are over, and revenue to education from the lottery falls back from $2 billion above the current level in year 4 to the current level of $650 million in year 5—what some are calling the first, $2 billion cliff. There is the same question as to the second cliff, in 2025, when annual revenue to education from the lottery falls from the current level of $650 million to zero.

Another pressing question is whether privatization of the state lottery will lead to more aggressive marketing to low-income population groups or an expansion of gaming locations (such as the keno parlors that the governor had proposed) or both.

Many see the governor’s proposal to finance temporary spending increases on education by selling off the future revenue stream from the lottery as a continuation of unsound fiscal practices that are mortgaging the state’s future. Even though Illinois’s unfunded public employee pension liability of $41 billion is the largest in the nation, the Blagojevich administration balanced the state budget for the past two years by deferring payment of more than $1 billion in scheduled pension contributions each year. The schedule of required state pension contributions “ramps up” significantly over time; that is, it includes steady annual increases. The state will owe over $2 billion in fiscal year 2008, and more than $6 billion in fiscal year 2025, when the $650 million in annual revenues from the state lottery would end under the governor’s proposal.

Apart from these questions about the long-term financial impact and lack of sustainability of the governor’s proposal, there are concerns that the governor’s proposal does not address the growing structural deficit in the state’s revenue system. The chronic failure of annual increases in state revenues to keep pace with inflation leads to real cuts in the funding of human service programs for the state’s most vulnerable populations. Nor does the proposal do anything to reduce the inordinate tax burden that Illinois’s highly regressive state tax system places on the state’s poorest taxpayers; if anything, by increasing reliance on the lottery as a revenue source, the governor’s proposal makes matters worse.

An alternative to the governor’s proposal would accomplish the governor’s goal of substantial increases in education funding and eliminate the structural deficit, make the state’s revenue system more equitable, and avoid further mortgaging the state’s financial future. The alternative would involve increasing the state income tax rate from 3 percent to 5 percent and broadening the base of the state sales tax to cover some services, while lowering local property taxes and including a tax credit to offset the impact on lower-income taxpayers. See http://www.aplusillinois.org/ for more details.

For more information, contact Dan Lesser, Sargent Shriver National Center on Poverty Law.