North Carolina Education Lottery: Education Program Funding and Legislative Update

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1 North Carolina Education Lottery: Education Program Funding and Legislative Update Brian Matteson NC General Assembly Fiscal Research Division 1 April 12, 2012

2 Overview Lottery Education Program Funding Refresher Appropriations History Legislative Action Actual Funding by Program and County 2 April 12, 2012

3 Programs Receiving Lottery Net Revenues The NC Education Lottery (NCEL) provides support to counties and postsecondary students: Pre-K Funds provided to county on behalf of 4-year old students Class Size Reduction (K-3) Funds provided to local education authority (school district) School Construction (Pre-K-12) Funds provided to county and are spent with mutual agreement of county commissioners and school board College Scholarships (Postsecondary) Funds are earmarked for needy students and are delivered through NC postsecondary institutions on student s behalf 3 April 12, 2012

4 Determining Lottery Funds for Education Original Lottery Act Statute (S.L ) set initial guidelines for allocating revenues: 50% for Prizes 35% for Education Programs 15% for Administrative Costs (8%) & Retailers (7%) It also created a Lottery Reserve Fund Initially fully funded at $50 million (1 st year revenues) Budget office allocates public school program funds to relevant agencies DPI, HHS and NCSEAA administer Lottery funding 4 April 12, 2012

5 2007 Change to NCEL Revenue Allocation S.L Change Added flexibility to Lottery revenue distribution To the extent practicable, the The Commission shall allocate revenues to the North Carolina State Lottery Fund in the following manner: order to increase and maximize the available revenues for education purposes, and to the extent practicable, shall adhere to the following guidelines: IMPACT: Commission may set prize percentage over 50% if it will increase total net education transfers HYPOTHETICAL EXAMPLE: Before Change: $930M x 35% = $325M Flexible Percentage (S.L ): $1,000M x 33% = $330M Net Change, Return to Education Programs: +$5 million 5 April 12, 2012

6 NCEL Annual Net Revenues Net revenues have grown every year after the elimination of the 35% requirement FY NCEL Return to Education ($ in Millions) Net Revenues Transferred to Education Programs Total Lottery Operating Revenues Net Revenues As % of Total FY * 35%* 2.5 FY , % 3.5 FY , % 6.5 FY , % 18 FY , % 7.3 Carryover Into Next FY *Approximately $13.5 million additional was carried into FY from partial year sales in FY The 35% refers only to revenues generated in FY April 12, 2012

7 Allocation of NCEL Education Funding Once Net Lottery Revenues (30-35%) are transferred to OSBM, they were typically allocated for education programs as follows: 50% for Pre-K and Class Size Reduction Particular amounts for each activity not specified 40% for Public School Construction 65% based on Average Daily Membership (ADM) 35% based on local effort 10% for Scholarships for Needy Students 7 April 12, 2012

8 Lottery Act Allocations The Lottery Act has served as a guidepost for distributing net Lottery proceeds The NCGA may override the distribution guidelines at any time Typically has done so through the annual budget process Following slides reflect suggested Lottery Act distributions 8 April 12, 2012

9 NC Pre-K and Class Size Reduction 50% of net Lottery revenues dedicated to NC Pre- K and Class Size Reduction No specific percentage required for each program NC Pre-K Lottery funds are combined with General Fund monies to support Pre-K services in counties NC Pre-K Slots are awarded to counties and act as a guarantee for a State payment for a month of services for an eligible child County doesn t receive a Lottery or General Fund slot 9 April 12, 2012

10 Class Size Reduction Funds support class size allotments of 1 teacher per 17 students in grades K-3 Combined with General Fund support for teachers 25,051 State-supported K-3 teaching positions in FY Lottery proceeds supported 1,828 of those positions, with the remainder supported by the General Fund 10 April 12, 2012

11 Lottery School Construction Funding Only Lottery program with a two-tiered formula 65% of funds distributed by student headcount (ADM) 35% of funds distributed by local effort Funds are deposited into the Public School Building Capital Fund Both ADM and local effort funds distributed through PSBCF and are subject to most of its rules Only differences from other PSBCF funds: No required 1:3 local match and funds can t be used for technology 11 April 12, 2012

12 School Construction Formula Typical Distribution: Fictional Example Overall total funding appropriated at $350M Allocate 40% for construction $140M ADM Funding: 65% of $140M $91M distributed to Counties based on student count Local Effort Funding: 35% of $140M $49M 12 April 12, 2012

13 Lottery School Construction--Local Effort Allotment Formula Three steps to allocate Local Effort funding: 1. Determine effective county tax rate (ECTR) 2. Compare all county s ECTR to Statewide average ECTR and every county with an ECTR above the Statewide average is eligible 3. Distribute funds to eligible counties based on ADM 13 April 12, 2012

14 Funding Availability General Assembly appropriates annual funding levels for Lottery proceeds Based on estimates of availability from NCEL, State Budget and Fiscal Research Division Use of Education Lottery Reserve If available revenues fall below the appropriated amounts, the Governor may transfer an amount from the Reserve to equal the appropriation When revenues exceed appropriation 50% to Public School Building Capital Fund and 50% to NCSEAA for scholarships 14 April 12, 2012

15 Appropriations History: FY & The Lottery was started in 2005 and was only in operation for part of FY It generated $63 million in net revenues for education $50 million went to fill the Lottery Reserve and the remaining $13 million was carried into FY FY Process First full year of implementation NCGA appropriated $425 million in anticipated revenues according to Lottery Act 15 April 12, 2012

16 Appropriations History: FY While the NCGA appropriates Lottery net revenues at the beginning of a fiscal year, there is no guarantee the estimates will be realized. Funds were appropriated amongst the four programs in accordance with the Lottery Act guidelines FY #1: Budgeted #2: Actual Program $ % Of Total Program $ % Of Total Classroom Teachers 127,864, % Classroom Teachers 79,123, % More at Four 84,635, % More at Four 84,635, % School Capital 170,000, % School Capital 131,006, % Scholarships 42,500, % Scholarships* 30,767, % Total Funding 425,000, % Total Funding 325,533, % 16 April 12, 2012

17 Appropriations History: FY FY #1: Budgeted #2: Actual Program $ % Of Total Program $ % Of Total Classroom Teachers 90,364, % Classroom Teachers 90,370, % More at Four 84,635, % More at Four 84,635, % School Capital 140,000, % School Capital 140,004, % Scholarships 35,000, % Scholarships 35,001, % Total Funding 350,000, % Total Funding 350,012, % Funds were appropriated amongst the four programs in accordance with the Lottery Act guidelines 17 April 12, 2012

18 Appropriations History: FY FY #1: Budgeted #2: Actual Program $ % Of Total Program $ % Of Total Classroom Teachers* 108,114, % Classroom Teachers 110,176, % More at Four 84,635, % More at Four 84,448, % School Capital 154,200, % School Capital 162,262, % Scholarships 38,550, % Scholarships 38,962, % Lottery Reserve (non-add) 19,750, Lottery Reserve 16,576, % Total Funding 385,500, % Total Funding 412,425, % Budget directed $19.75m to be transferred from Lottery Reserve to Classroom Teachers to cover a shortfall Governor declared budget emergency and $50 million reserve was redirected to other education purposes. $16.6 million of these funds were restored at year-end Budget also required that all counties received the same amount of School Capital funding per pupil 18 April 12, 2012

19 Appropriations History: FY FY #1: Budgeted #2: Actual Program $ % Of Total Program $ % Of Total Classroom Teachers 99,399, % Classroom Teachers 99,399, % More at Four 84,635, % More at Four 84,635, % School Capital 147,228, % School Capital** 179,109, % Scholarships 36,807, % Scholarships 56,140, % UNC Need-Based (non-add) - 0.0% UNC Need-Based (non-add) 19,333,317 Lottery Reserve - 0.0% Lottery Reserve - 0.0% Total Funding 368,070, % Total Funding 419,284, % FY Budget made several modifications to FY allocations in response to projected $51m windfall: Allocated $32 million in overages to School Capital so that every county received same per-pupil funding ($125/ADM) Set-aside $19.3 million to support UNC Need-Based Aid awards to be made in FY These grants are not the same as the Lottery Scholarships 19 April 12, 2012

20 2010 Legislative Action In its FY Budget (S.L ) the NCGA also made some significant policy changes to how it appropriated FY projected net revenue: For the first time, it did not allocate funds according to the guidelines in the Lottery Act It also allocated $35 million in FY and net revenues to cover a possible Medicaid funding shortfall caused if anticipated Federal funding was not realized S.L , Section 2.3 laid out a priority order directing the Director of the Budget to transfer certain resources to cover a shortfall if all or some of the Federal funds went unrealized 20 April 12, 2012

21 2010 Legislative Action (con t) Only $343 million of the $518 million in anticipated Medicaid funding was realized, requiring some net Lottery proceeds to be redirected The Lottery funding source is identified as, unclaimed Lottery prize money and excess receipts. $26.6 million in excess receipts and unclaimed prizes were transferred for this purpose This marks the first and only time the NCGA has authorized the use of Lottery net proceeds for a noneducational purpose While transfer is a departure from Lottery Act, it is allowable 21 April 12, 2012

22 Appropriations History: FY FY Lottery Act Allocation Guidelines Budgeted Amounts Actual Amounts Program $ % Total $ % Total $ % Total Classroom Teachers 136,038,041 31% 220,643,188 48% 206,667,972 45% Lottery Reserve (non-add) 16,808,076 16,808,076 More at Four 84,635,709 19% 79,635,709 17% 79,635,709 17% School Capital 176,539,000 40% 113,741,929 25% 108,145,132 23% Scholarships for Needy Students 44,134,750 10% 36,807,021 8% 41,943,983 9% UNC Need-Based Aid** - 0% 7,327,729 2% - 0% FMAP Medicaid Transfer 26,615,200 6% Total Funding 441,347, % 458,155, % 463,007,996 94% **Funds made available from Scholarships amount FY Budget changed typical net revenue allocation Distributed $84 million more to Classroom Teachers than typical Lottery Act allocation Set-aside $7.3 million ($26.6m combined & 10-11) to support UNC Need-Based Aid awards to be made in FY April 12, 2012

23 2011 Legislative Action In its FY Budget (S.L ) the NCGA mostly continued the allocations made in FY There was no Medicaid transfer or any other reallocation made for non-education purposes Any overrealized funds allocated to School Capital Lottery Act Allocation Guidelines Budgeted Amounts Program $ % Total $ % Total Classroom Teachers 132,851,106 31% 220,643,188 52% Pre-K (formerly More at Four) 79,635,709 19% 63,135,709 15% School Capital 169,989,452 40% 100,000,000 24% Scholarships for Needy Students 42,497,363 10% 30,450,000 7% UNC Need-Based Aid - 0% 10,744,733 3% Total Funding 424,973, % 424,973, % 23 April 12, 2012

24 Actual Funding by County Where does the money go? To the counties and scholarship recipients to which Lottery proceeds are earmarked Fiscal Research collaborates with DPI, UNC, SEAA and NCEL to compile an annual accounting of the distribution of Lottery funding Publicly available on NCEL website: 24 April 12, 2012

25 Actual Funding by County-Table Excerpt Fiscal Year NC Education Lottery Expenditures by County Class-Size Reduction Sch. Capital More at Four Scholarships TOTAL COUNTY NAME Teachers Expenditures Funding Expenditures 1 Slots 2 Number Spending EXPENDED Alamance County ,515,975 2,809,925 1,107, ,667 6,070,412 Alexander County , , , ,090 1,550,758 Alleghany County , , , , ,323 Anson County , , , ,900 1,231,334 Ashe County , , , ,012 1,135,339 Avery County , , , , ,885 Beaufort County , , , ,125 2,046,965 Bertie County , , , ,750 1,060,337 Bladen County , , , ,902 1,825,811 Brunswick County ,913 1,478,650 1,062, ,112 3,607,302 Buncombe County ,005,894 3,679, , ,932 7,346,940 Burke County ,838 1,738,629 1,165, ,851 4,319,942 Cabarrus County ,359,332 4,040,898 1,258, ,839 8,410,641 Caldwell County ,700 1,633, , ,535 3,348,070 Camden County , ,638 90, , ,584 Carteret County ,631 1,034, , ,730 2,295, April 12, 2012