There's not much good news at the moment about the state budget – it's overdue, as usual; there's no sign of agreement anytime soon; no permanent fix is in sight – but there is one bright spot. Increasingly, it looks as if Republicans and Democrats alike are leery of Gov. Arnold Schwarzenegger's plan to "securitize" state lottery proceeds.
There is ample reason for skepticism, not the least of which is that few people seem to understand the governor's plan. Part of that problem may be linguistic. Most people don't have "securitize" in their vocabulary. (Dictionaries didn't either until the 1970s, when the era of great financial innovation began.)
Basically, "securitization" has two meanings. One is to assemble a bunch of loans or other debt obligations into a new, tradable security. (For an example, look no further than the mortgage-backed securities that are at the root of the subprime mortgage crisis.)
The second meaning – and the one that the governor's plan depends upon – is to take an existing revenue stream (such as the lottery) and sell future rights to that money. For this to work, the people who buy the new securities – basically, bonds – have to believe that the future revenue stream will be large enough for them to make a profit. And the seller of the new security – the state – has to believe that there will be enough money coming in to pay off the new debt.
This is the real problem with the governor's proposal. It relies on projections of future lottery proceeds that may or may not be believable. Those proceeds are based on the notion of increasing lottery sales – which may or may not be achievable. If it's not, some future governor and Legislature could be looking at even more financial trouble than now.
There's nothing simple about "securitizing" the lottery or about solving the state's budget crisis. But there is a simple truth: The time is past when the state can rely on gimmicks to solve its financial problems. If the bipartisan skepticism about "securitization" reflects a growing recognition of that fact, it's a bright spot indeed.
