Lopez: A lesson in how lottery money is spent

‘Where is the money from the lottery going?” asked a reader named Jean.

It never fails. Write about school funding shortages in California, and the emails start pouring in from people who insist the lottery was supposed to solve all our education money issues and wonder why it hasn't.

The latest barrage came after my column about an L.A. school district parcel tax that suffered a crushing defeat at the polls, despite a projected budget deficit in coming years.

“The Lottery Money,” wrote Fern. “Where is it?”

Sometimes readers are merely quizzical. Other times they're indignant.

“Why are you not talking about the lottery?” asked Carol. “I'm sure you remember when it was on the ballot, a big selling point was that the majority of the pie would go to our public schools to offset costs. Is no one looking deep into the corruption of the lottery in our state?”

OK, so today I am talking about the lottery. I am not the first to do so and probably will not be the last. In 2016, my Los Angeles colleague John Myers capably explained the mystery of the “missing” lottery money, but the message doesn't seem to have gotten through to everyone.

Since Carol introduced the specter of corruption, let me begin with a June 7 story by Los Angeles Times reporter Patrick McGreevy, who reported the resignation of California Lottery director Hugo Lopez (no relation) after a string of controversies. In April, a state audit concluded that lottery officials ran up $305,000 in improper or questionable expenses over four years on travel, food, gifts and entertainment.

Shame on them. But before you say, “Aha! So that's where the money goes,” let's get to the basic math.

The lottery, approved by voters in 1984, was never intended to be a major funder of the state's schools. Last year the lottery sent a record $1.7 billion to K-12 schools and colleges and universities, but that money is divided among thousands of schools and covers only about 1.5% of the state's total education budget.

Some of my readers recall that when the lottery started, 34 cents of every dollar was supposed to go to education. But in 2010, the Legislature relaxed that requirement on the theory that bigger payouts would bring more total revenue. The same bill limited administrative costs to 13% of sales.

So who got the biggest chunk of the $7 billion taken in by the lottery last year?

Lottery winners.

Lottery revenues have increased in recent years, so it's fair to ask if a bigger percentage should go to schools. But even with such an adjustment, California's shameful ranking in the bottom tier of funding per pupil isn't going to change.

So what's the answer?

Brace yourself, because it involves some tinkering with Proposition 13. But before you scream, your property taxes as a homeowner would not change. Only commercial property owners would get raked.

My L.A. Times colleague Michael Hiltzik laid out the details in March, and I've written in the past about how the business side got an even bigger break than homeowners from California's landmark 1978 tax-cutting proposition.

To summarize, Proposition 13 was established because as property values rose rapidly, people feared they'd be priced out of their homes by soaring property taxes. Proposition 13 established modest annual increases until a property changes ownership, at which point it's reassessed at market value.

But owners of commercial properties managed to employ partnerships and other tricks to avoid reassessments when properties changed hands. Before Proposition 13, residential properties accounted for 53% of all assessed value in L.A. County while commercial and industrial properties accounted for 47%, according to Lenny Goldberg, a consultant to the California Tax Reform Association. By 2017, said Goldberg, residential properties had skyrocketed to 71% of assessed value, with the commercial and industrial share down to 29%. (A comparison for Sonoma County shows the residential share rising from 66% in 1984-85 to 72% in 2011-12, with commercial property taxes declining from 33% to 27%).

The November 2020 ballot initiative, which Goldberg helped write, would tax commercial and industrial properties at full market value and they would be reassessed every three years. The state's schools and local governments would divide billions in new revenue - estimates vary from $6.5 billion to $12 billion.

“This is going to affect the Disneylands and the Chevrons and the owners of properties that have not changed hands in four decades,” said Ben Grieff of Evolve, a Bay Area-based community group that's pushing the ballot initiative along with a teacher-backed statewide operation called Schools and Communities First.

Opponents are already loading their cannons, and will spend a Fort Knox fortune next year to blast the initiative into oblivion.

“This is yet another attack on the longstanding taxpayer protections in Prop. 13,” said Jon Coupal of the Howard Jarvis Taxpayers Association. Other foes have argued that the initiative would make a bad business climate worse and discourage start-ups or relocations from other states.

Nonsense, said Goldberg, adding that the explosion of business in Silicon Valley and elsewhere in the state tells a different story. About 50% of California's businesses are new enough, he said, that their properties are already assessed at or close to their full market value.

“Investment has occurred at market value for years and years and years,” he said.

A small percentage of California businesses have enjoyed the vast majority of the property tax windfall, said Grieff. And there are great disparities. In downtown Los Angeles, land assessments on some parking lots are as low as $12 per square foot. At others they are as high as $600 per square foot, depending in part on ownership history and Proposition 13 protection. So Grieff expects some property owners who are at a competitive disadvantage to support the reassessment initiative.

No doubt opponents will argue that higher property taxes will be passed on to consumers. But Grieff had a ready response to that.

“Prices are based on markets,” he said, “not property taxes.”

You've got a lot of time to think about the pros and cons, folks. In the meantime, play the Powerball or SuperLotto Plus or Scratchers if that's what you like to do. Just don't expect it to save our schools.

Steve Lopez is a columnist for the Los Angeles Times.

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