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Gaming the System?

The Virginia Lottery has given more than $5 billion to public schools. But in the long run, the schools might be losing.

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Richmond, you have a little gambling problem.

Or maybe you just think you're lucky.

Whatever the reason, residents of the city of Richmond spend more on lottery tickets than anywhere else in Virginia: $78.3 million in the last fiscal year. That's more than Virginia Beach, which has two and a half times the population. More than Fairfax County, which has five times as many people.

But it's all for a good cause, right?

"Helping Virginia's Public Schools," reads the tag line printed on the backs of tickets. The lottery's website goes a step further, declaring: "More than $5 billion contributed to Public Education!"

Technically, it's true. All proceeds from the lottery do go to the state's public schools. Just not in the way many people think.

According to educators who have watched the lottery for years, much of the public believes the lottery money is extra funding, on top of what the state's required to give. They remember the lottery being pitched that way, as bonus funding, when Virginians voted on it 24 years ago.

Instead, educators say, the state is using all of the lottery money — about $450 million a year — to meet its obligations to the schools. None of it reaches local coffers as extra funding.

"It's a big ruse, and I don't believe Virginians, in general, are aware of it," says Kitty Boitnott, president of the Virginia Education Association.

"They're using it instead of anteing up state aid in the general fund," she says of the lottery money. "That's been a slow and insidious movement that's been going on for a few years now."

The swap has been causing budget headaches since 2009, the first year the bonus funds went from small to nonexistent. This year, while other pools of money dry up and school leaders reach into the furthest corners of their budgets to make cuts, concern over the lottery money's disappearance is growing.

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Things are looking glum for schools — in the Richmond region and statewide.

In the last three years, since the recession began, the state has hitched its belt tighter and tighter. Local governments, which used to get 52 percent of the state's general fund money, get 45 percent. And the entire general-fund pool has shrunk, drained by increasing costs for Medicaid and pensions for state employees and teachers. Virginia's schools are funded with a combination of federal, state and local money. In 2011 schools received the same amount of state funding as in 2007.

Richmond schools may be suffering more than most. To figure out how much state aid each school system gets, the state uses a complex formula called the composite index, which calculates the relative wealth of the community. The more money residents have, the less money the state will kick in for schools.

Trouble is, the formula says that Richmond is rich. (And it would be, if all those lottery tickets that residents buy were winners.) Richer than Henrico, Chesterfield and Hanover counties — even though more than 25 percent of Richmonders live below the poverty line. Children are even worse off, with 35.6 percent living in poverty. Approximately three-quarters of pupils receive free or reduced lunches.

The reason for the skewed results, generally speaking, is that index takes into account only the city's revenue sources, such as taxes, and not its expenses, such as maintaining its older infrastructure. The city of Richmond has asked for the state to study the composite index and potentially change the way it's calculated. But for now the city anticipates a deficit of $26.8 million in fiscal year 2013 because of federal money running out and retirement and health-care costs increasing, among other things.

What does that mean for education?

"At this point in time, it's like everything's up for grabs," says Lynn Bragga, budget director for the Richmond Public Schools. Programs such as advanced-placement classes might need to be eliminated. More children would have to be crammed in each classroom. And if that happens, the school system will forfeit $4 million in lottery money intended to reduce class size. "So you can see how horrible the decisions are going to have to be," she says.

Even in Henrico, where the school system has traditionally been flush, the well for extra projects may be running dry.

On Dec. 13, school system representatives went to the Henrico Board of Supervisors to pitch their plan for a new athletic field at Douglas S. Freeman High School — a seemingly innocuous proposal. In years past, the board might have spent the meeting debating the merits of Bermuda grass vs. artificial turf.

But this time, County Manager Virgil Hazelett stopped the project dead in its tracks. "I have major concerns about future obligations to the board," he says. The county simply could not afford to spend $5.1 million to buy and develop the property, he said.

"I think it's probably the first time I've ever disagreed with the schools," Hazelett says. He suggested that the school system investigate other, cheaper options, such as constructing a field on its driver-education practice lot, or sharing fields with local elementary schools. Henrico no longer can afford to buy 160-acre sites and football fields for its future high schools, Hazelett said: "And I know it's heresy."

Funding for public schools rises by $438 million in Gov. Bob McDonnell's proposed two-year budget, introduced Dec. 19. But this extra money is offset by some cuts. McDonnell's budget does not allow for inflation in costs and proposes to reduce funding for the Virginia Preschool Initiative, among other things.

But what about the lottery money that's supposed to boost Virginia's schools?

The story of the lottery goes back to 1987, when Virginians voted to create one after a lengthy and polarizing public battle.

Supporters pitched it, in part, as a boon for public education. Some educators were suspicious, "because we didn't think it was going to be a reliable revenue stream," says Robley Jones, the Virginia Education Association's director of government relations and research. "That's what we thought. We were wrong."

The lottery proved to be a consistent moneymaker. And the idea that it was all for education stuck in the minds of the public, though nowhere did the lottery law say how profits would be spent.

Before long, the economy worsened and those dollars began being used to bolster the general fund. Eventually people caught on. Grass-roots groups clamored that they'd been misled, and in 2000 voters passed an amendment dedicating the lottery money entirely to education.

Sort of.

Immediately, about 60 percent ($191 million that year) was swapped out for the basic aid the state is supposed to give the schools anyway. That freed up $191 million for politicians to use elsewhere.

The remaining 40 percent, or $123 million, became the promised bonus funding. Divisions were directed to use half of it for nonrecurring expenses such as construction, and for several years the money helped repair or replace many a crumbling public school. Richmond used to get about $2 million per year.

That was then.

Today, the 60-40 split is gone, and none of that money is coming to the schools on top of the state's usual aid. Instead, the approximately $450 million in lottery money pays for 19 specific programs, such as school breakfasts and early reading intervention, which once were paid for by the state's general fund.

Most of the programs picked for lottery funding are the ones that support poorer children, Jones says. In fiscal year 2012, for example, nearly $64 million went to programs for at-risk children and $40 million went to English as a second language programs.

Richmond benefits greatly from these programs because so many of its students are from low-income homes, school officials say. The lottery-funded Virginia Preschool Initiative, combined with the federal Head Start program, helps prepare 900 city children for school each year. The city is able to keep class sizes less than 18 pupils per teacher in kindergarten through third grade, because of $4 million in lottery money for the class-size reduction program. That means children affected by social woes can get extra attention in the early grades, says Bragga, the budget director.

All in all, Richmond Public Schools receive about $15 million in lottery money each year. But soon that could change.

The estimated costs for lottery-funded programs statewide during the next two years — fiscal years 2013 and 2014 — exceed what the lottery will bring in by $218.8 million, a recent report by the Virginia Department of Education found.

To balance things out, the Education Department proposes to pay for textbooks and programs for at-risk children with general fund money. But that still leaves an $86.5 million shortfall during the next two years.

That means something will have to go. The House of Delegates' position has been to make the programs fit the money. Options that the House Appropriations Committee have identified include prioritizing funding for certain programs, or giving the money to cities and counties as block grants and letting those school systems decide how to spend it.

That's what House Republicans proposed last year, says Democratic Delegate Jennifer McClellan: a block-grant plan that would divvy up lottery money by the number of students, instead of counting low-income children. The result, she says, is that "the city's going to get less money and have more kids to spread it over."

"They took programs for poor children and pushed them into the lottery. Then the recession hit and you've got more poor kids," Jones says. "They're saying, 'Sorry, poor kids; the lottery isn't generating money for these programs, so we're going to cut them.'"

Instead of paying for worthy programs from the general fund, as it once did, the state will cut them back to match lottery income. That means, in a way, the lottery's now being used to reduce funding for education, Jones says. "To my way of thinking, it really is a perverse use of the lottery."

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Even though the lottery money has never been sent to the schools entirely as supplemental funding, educators say the public still believes that's how it works.

One reason why may be the complexity of state education funding. When state officials make cuts, Jones says, they do it in such a way that only a few people in the game even notice.

"You almost have to devote your life to it to understand it," he says.

Another reason could be the lottery's advertising campaign. Lottery officials present the year's proceeds in the form of a giant check made out to "Virginia Public Schools." And then there's that tag line: "Supporting Virginia's Public Schools."

Paula Otto, executive director of the Virginia Lottery, says the tag line has been used for years. It's a reminder of where the lottery money is going, without getting into the details of decisions made by state government, she says. The lottery has no control over how its profits are spent.

The lottery's a popular game. About 30 percent of Virginians say they've played in the past month, according to a Virginia Lottery survey. People of all ages and incomes buy tickets; 39 percent of lottery players have a household income of $80,000 or more.

Research on lottery players has shown they're glad the money goes toward public schools, Otto says.

But do they know the money is being used to supplant — not supplement — state funding?

"I don't know if we've asked that specifically," she says. "I think most folks acknowledge there are budget challenges everywhere."

Costs for education are going up while state revenues have plummeted in the recession, says Ric Brown, Virginia's secretary of finance. Lottery money is being used to fund specific programs in part because those programs otherwise might not get funded.

There just isn't room in the budget to give lottery money to schools as a bonus, Brown says: "You don't have the luxury to say there's money that doesn't really have a purpose anymore."

Republican state Sen. John Watkins, who was a member of the House of Delegates when the lottery was launched in 1987, takes issue with the Virginia Education Association's contention that lottery money should be bonus money to schools.

Every two years, the state Board of Education re-benchmarks the cost of K-12 education — which means recalculating the base funding for schools, considering the number of students and staff, inflation and costs. Watkins has seen that benchmark jump by hundreds of millions again and again. Lottery proceeds have not kept pace — so is it fair to expect the lottery to keep providing extra money?

"They want bonuses," Watkins says of the schools. "And there are no bonuses around. I mean, the economy has got to get better." That being said, Watkins says his first priority this session is defending education "from getting hit from all directions."

Gov. Bob McDonnell's proposal to divert an additional percentage of the sales tax to transportation "is a raid on school funding," says state Sen. Donald McEachin, D-Henrico. "Make no mistake about it." Instead, McEachin and other Democrats say, transportation should be removed entirely from the general fund so it doesn't compete with schools.

Restoring lottery funding as extra money for schools isn't on the table this session of the General Assembly. That won't happen until the state gets extra revenue coming in — and "I don't think we're there yet," McClellan says.

For things to change, "there's going to have to be some public outcry," Jones says. But people still buy those tickets, he says, thinking, "I'm helping the schools."

The Virginia Lottery issued a news release Dec. 4 warning customers against giving lottery tickets to minors as holiday gifts, for fear of encouraging gambling behaviors. Under Virginia law, anyone who gives a lottery ticket to a person younger than 18 is guilty of a Class-3 misdemeanor, punishable with a fine of as much as $500. S

Elisabeth Hulette, an education reporter for The Virginian-Pilot, contributed reporting to this piece.

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