The 1987 session of the General Assembly authorized a referendum on November 3, 1987, on the question of establishing a state-operated lottery in Virginia. The referendum was successful, and the legislation providing for the lottery was effective December 1, 1987. Lottery ticket sales began on September 20, 1988.

The enabling legislation did not, and does not now, specify a particular use for lottery profits. Such profits are to be transferred to the general fund at the close of each fiscal year after the balances in the Lottery Fund are audited and certified by the Auditor of Public Accounts. Once transferred to the general fund, lottery profits are available for appropriation by the General Assembly for any purpose it chooses.

In 1989, the General Assembly passed an Act (Chapter 640, 1989 Acts of Assembly) to appropriate lottery profits to specified capital outlay projects. These projects were prioritized in rank order and could only be released (by the Governor) after lottery revenue in a sufficient amount was transferred to the general fund. The original priority order for releasing these capital projects was changed by legislation passed in the 1990 General Assembly session (Chapter 922, 1990 Acts of Assembly). This revised legislation authorized a total of $473.2 million for capital projects from the general fund, contingent on lottery receipts, over a three-year period: the fiscal years ended June 30, 1990, 1991, and 1992.

With the recurring revenue shortfalls from the official general fund forecast for fiscal year 1990 and the 1990-92 biennium, funding was withheld for capital outlay projects not under contract. As a result, lottery profits were used to finance general fund operating and capital programs approved by the General Assembly in the general Appropriation Act. Otherwise, further cuts would have been necessary in the general fund budget that finances, among other things, such high priority services as public education, higher education, corrections, health care, and mental health and mental retardation community services.

A capital outlay project, passed by the 1993 special session of the General Assembly, authorizes the Virginia Public Building Authority (VPBA) to issue bonds for $17 million plus amounts needed to fund issuance costs, for a new building at the corner of Ninth and Broad Streets in downtown Richmond. The new office building will be occupied by the Lottery Department and several other state agencies. In enacting this debt authorization, the 1993 General Assembly also asked that the policy governing the use of lottery transfers be revisited.

The fourteenth enactment clause of the VPBA legislation requires that the Governor develop a plan to address the following issues:

1. Detail when state lottery proceeds will no longer be needed to fund operating expenses of the Commonwealth and become available to pay the debt service on the bonds issued to finance the Ninth and Broad Street building (the building);

2. Detail the anticipated annual debt service, through their maturity, on the 1993 VPBA bonds used to finance the building; and

3. Detail the net proceeds estimated to be derived from the state lottery over the lifetime of the VPBA bonds used to finance the building;

4. Detail any changes necessary in the State Lottery Law to create an escrow fund mechanism by which sufficient amounts of state lottery net proceeds can be set aside annually to pay the annual debt service on the VPBA bonds used to finance the building.

The purpose of this study is to address the above issues. The issues are rearranged to facilitate readability of this report.

If lottery profits are to be earmarked for VPBA debt service costs, it is important to first determine the projected cost of debt service on the bonds in question, and then the anticipated amount of lottery receipts over the life of these bonds before exploring alternative uses of lottery funds.

Accordingly, this study will address the specified issues in the following order (Issues #2, #3, #4, and #1).