For the first time in the Tennessee Education Lottery's five-year existence, spending on HOPE scholarships and the state's pre-K program outpaced lottery profits.
Lottery officials are "projecting a slightly lower return to education for FY09 than the previous year," said Kym Gerlock, the lottery's spokeswoman. "This will be the first time we are not projecting growth."
State finance officials plan to dip into lottery reserve funds to the tune of about $10 million just to pay for the HOPE scholarships already promised for this year.
Gov. Phil Bredesen also is asking the General Assembly to send about $22 million from the state's general fund to pay for pre-K, which also is funded by the lottery.
Legislators admit this is a unique problem. The lottery has been a predictable cash cow, and it still turned over more than $200 million over the first three quarters of fiscal year 2009.
"I suspect that when the Senate Education Committee convenes next legislative session, one of the first things they will consider is the HOPE scholarship and the lottery," said state Sen. Andy Berke, D-Chattanooga.
Though the proceeds fell below expectations, Sen. Berke thinks it's too early to make changes that will make it harder to receive or hold onto a scholarship.
"We really have to give it some time," Sen. Berke said. "This is really a unique situation. All this time, the lottery has been running in a posture where it grew in profits every year."
The lottery slippage comes a year after the legislature made it easier than ever to continue to receive a HOPE scholarship in Tennessee. Legislators voted last year to lower the GPA required to keep the scholarship once students are in college.
But legislators say they will wait before making any changes to scholarship requirements.
Now, students must have a 2.75 GPA after 48 semester credit hours and a cumulative 3.0 GPA in subsequent years to keep their HOPE scholarships. Before, students had to keep a 3.0 all four years, which caused many students to lose the funding quickly.
Lottery officials have insisted that lotteries can thrive in tough economic times. Though high gas prices kept many away from convenience stores -- which hurt sales -- Tennessee lottery officials also blame their profits downgrade on its big multistate game, Powerball.
"We attribute this to a slowdown in Powerball sales due to a fiscal year whereby we have not experienced a $300 million-plus Powerball jackpot," Ms. Gerlock said.
Jim Hill, chairman of the board of the Tennessee Education Lottery, said the weak economy is an "obvious reason" for the slowdown in ticket sales.
But future profits are almost assured, said Mr. Hill, who lives on Signal Mountain.
"We view this year as an aberration," he said. "If we would have had just one Powerball jackpot in the $300 million range, we would have had a growth year."
Statistically, Powerball should yield about three jackpots in the $300 million range each year, Mr. Hill said.
Updated financial figures for the lottery were not available this week, Ms. Gerlock said, but in January sales were down about 2 percent. Over the first three quarters of this fiscal year, the lottery sent about $197 million to the state to fund education, but the state paid out $228 million in scholarships, records show. State officials believe that by the end of the fourth quarter they will have to use only $10 million from Tennessee's $395 million lottery reserve fund.
That scholarship payout figure may continue to grow, since the legislature made it easier to hold onto the scholarship.
"As scholarships continue to rise in the future, the state will work with the legislature to determine the best course of action to take," said Lola Potter, a spokeswoman for the Tennessee Department of Revenue.
One political leader said Georgia's HOPE scholarship requirements have been in constant flux, changing as lottery revenue has leveled off ever since the lottery was introduced in 1993.
"At first we liberalized requirements, eliminating the needs-based requirement that capped income," said state Sen. Jack Hill, R-Reidsville, Ga., who was chairman of the Senate's Higher Education Committee and now heads the budget-writing Appropriations Committee. "But three or four years ago, we had to address some of the problems with the requirements ... and eliminate some of the gaming of the system."
For the lottery's 16-year history, Sen. Hill listed more than half a dozen tweaks that made HOPE scholarships harder to obtain and keep. Some fixes, such as capping the number of college credit hours for which HOPE would pay, eliminated students from getting multiple degrees off one HOPE scholarship.
Other changes made uniform the statewide GPA required to get and hold onto the scholarship.
"We have had all sorts of efforts to streamline it, to be sure we are focusing on, a. truly eligible students and b. those who are truly staying eligible," Sen. Hill said.
Over the years, Georgia's lottery profits have slowed down, too.
"We're looking at the lines crossing again," Sen. Hill said. "Georgia has certainly got some challenges ahead of itself."
Lottery earnings-spending for FY09
Net Lottery Proceeds:
First quarter $64,873,000
Second quarter $62,040,000
Third quarter $70,909,000
Subtotal net lottery proceeds $197,822,000
First quarter $34,234,310.86
Second quarter $93,050,783.33
Third quarter $100,822,165.97
Subtotal scholarships $228,107,260.16
Source: Tennessee Department of Finance