NC lottery proceeds no longer linked to formula
The General Assembly this year kept earmarking all North Carolina lottery proceeds for education, just as its predecessors said they would when they approved the state-sponsored gambling in 2005. This education link is why it's always been branded the North Carolina Education Lottery.
But lawmakers decided to rid themselves of the original formula for how net lottery profits received annually — projected for $481 million this fiscal year — would be distributed. And they again designated some funds to education initiatives not identified in the original North Carolina State Lottery Act.
Backers of the formula's repeal argue it hadn't been closely followed for several years. They add that lottery money has been moved around to cover shortfalls for education programs beyond the formula, and even for Medicaid. The updated lottery law still makes clear the profits must be used for "education-related purposes."
"It really wasn't a substantive change in terms of actual budget practices over the years," said Sen. Pete Brunstetter, R-Forsyth and co-chairman of the Senate Appropriations Committee. He called it "just a cleanup of Lottery Act language."
Others are worried the state is slipping away from the basis upon which the lottery was sold to lawmakers and the public. County governments are particularly troubled as they've watched their slice of the lottery pie for school construction nearly cut in half.
"The lottery was created with the proceeds to be for the educational system, and I think it should strictly adhere to that," said state lottery commission member Jody Tyson of Greene County. Any "citizen or government official's first thought should be to protect the integrity of that original formula or that original purpose, and that was for education."
The 2005 law directed 50 percent of net lottery proceeds be used to reduce class sizes in early grades by hiring more teachers and to support pre-kindergarten programs; 40 percent to a special fund for school construction needs; and 10 percent to college scholarships for needy students. The state is expected to exceed $3 billion in all-time lottery earnings next month.
The legislature essentially followed the 50-40-10 formula it approved for the lottery's first three full years.
With the formula not enshrined in the state constitution, future sessions of the legislature could simply pass a bill to change the formula. Instead of getting rid of the formula, however, legislators simply directed in the budget law that one-time exceptions be made.
The biggest shift occurred during the 2010-11 fiscal year, when Democratic lawmakers facing an extended fiscal crisis budgeted more than 60 percent of proceeds for hiring teachers and pre-kindergarten, while 25 percent went to school construction. Legislators also allowed some unclaimed prized money and "excess receipts" to handle a Medicaid shortfall.
The shift toward teachers and pre-K continued under Republican control of the legislature. School construction received $100 million again this year, or 21 percent of lottery profits. Lottery money will go this year to seven initiatives, three of which weren't identified in the 2005 law. They include student financial aid for University of North Carolina students and digital learning technology for public schools, which new Gov. Pat McCrory wanted.
The North Carolina Association of County Commissioners — which made getting back its 40 percent share a top priority this legislative session — saw its fortunes reversed with the formula's repeal in the budget law.
Many counties borrowed money to build schools on the belief that a steady stream of lottery funds could be counted on to make bond payments. Had the 40 percent requirement been followed, counties would have received $210 million more over the previous three years, the commissioners' group says.
Johnston County expected to receive $4.5 million annually from the lottery to help pay for school construction and renovations following a successful 2007 bond referendum, county manager Rick Hester said. Now the county is getting only $2.3 million per year.
"That is equivalent to two pennies on our tax rate. It's definitely had an impact on us," Hester said. The county has made cuts elsewhere in county government.
Rep. Leo Daughtry, R-Johnston, said he got fellow House budget-writers to retain the formula in its version of the budget bill. But the Senate, which wanted to repeal the formula, ultimately prevailed during negotiations. Daughtry says he's hopeful the formula can be restored next year, saying lawmakers should stick with the lottery's original intent.
"Changing it now is going back on the state's word," Daughtry said.
Brunstetter, a county commissioner for 13 years, said by email the General Assembly has given fiscal breaks to counties in other areas in recent years, most notably ending the requirement that they pay 15 percent of Medicaid expenses.
Others worry the formula's repeal will make it harder to ensure lottery funds add to the overall education budget, rather than replace money that can be shifted to other agencies.
John Rustin with the North Carolina Family Policy Council, a longtime lottery opponent, said proving the funds were supplemental in nature was always going to be impractical.
"There is a real responsibility by the legislature to ensure that the manner in which the lottery was sold is lived up to," Rustin said, "and there's just no guarantee that has been or will be the case."
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