What can Tennessee legally spend net lottery proceeds on under Article XI, Section 5, and how do specific uses (HOPE scholarships, contractor services, pre-K, after-school, energy-efficient schools) measure up?

Subject

Opinion No. 11-20, Use of Net Lottery Proceeds, March 4, 2011

Plain-English summary

Article XI, Section 5 of the Tennessee Constitution, the provision that authorized the state lottery in 2002, ties net lottery proceeds to a specific spending hierarchy. Net proceeds must first be used "to provide financial assistance to citizens of this state to enable such citizens to attend post-secondary educational institutions located within this state." After that priority is funded, any excess may be appropriated to two further categories: (1) capital outlay projects for K-12 educational facilities, and (2) early learning programs and after school programs. The Constitution also imposes a "supplement, not supplant" rule: lottery proceeds must add to, not replace, non-lottery educational resources.

The Executive Director of the Fiscal Review Committee asked the AG to walk through specific lottery-funded expenditures and decide whether each one complies with these constitutional limits. The AG issued a long, line-by-line opinion. The major conclusions:

Scholarship programs (Article XI, Section 5 priority #1)

• HOPE Scholarship and related programs under Tenn. Code Ann. §§ 49-4-901 et seq.: yes, net lottery proceeds may be expended directly for these scholarships. They clearly "provide financial assistance to citizens of this state to enable such citizens to attend post-secondary educational institutions located within this state."
• Tennessee Student Assistance Awards under §§ 49-4-301 et seq.: the General Assembly appropriated $6.8 million in interest earnings on the lottery-for-education account to supplement these awards. Those earnings may not be "net proceeds of the lottery's revenues" within the constitutional restriction (per Op. Tenn. Att'y Gen. 03-066), but in any case, the awards themselves fall within the post-secondary financial assistance priority.
• Laptops for dual enrollment grant recipients under Tenn. Code Ann. § 49-4-930(f): yes, these provide financial assistance for post-secondary education attendance and may be funded from net lottery proceeds.
• Administrative expenses incurred by TSAC and THEC to manage the lottery scholarship program: yes, reasonably necessary administrative costs may be funded from net lottery proceeds. The AG borrowed an analogous Oregon AG opinion (Op. Or. Att'y Gen. OP-6373) and applied the principle that administrative support is part of providing a program.
• Lottery Scholarship Day expenses under Tenn. Code Ann. § 49-4-932(j): yes, the General Assembly explicitly authorized these costs to be paid from the lottery-for-education account.

THEC's contract with XAP Corporation (CollegeforTN.org)

The AG broke this contract down section-by-section:

• College Planning Tools (A.3.c.), to the extent used to provide information about Tennessee higher education institutions and to enable applications: allowed.
• Financial Aid Planning Tools (A.3.d.): allowed.
• Adult Student Module (A.3.f.), to the extent it provides college and financial aid planning: allowed.
• Professional Center (A.3.g.), to the extent used by educators to send transcripts to Tennessee higher education institutions and to TSAC for GPA verification: allowed.
• Career Planning Tools (A.3.a.), High School Planning Tools (A.3.b.), Life-long Portfolio (A.3.e.), other Adult Student Module functions, other Professional Center functions, and Middle School Module (A.3.h.): not allowed. The AG concluded these services help students plan careers and meet general academic qualifications but are not closely enough linked to administering the lottery scholarship program to qualify as reasonably necessary administrative expenses.

Early learning programs (Article XI, Section 5 priority #2)

• Pre-kindergarten programs under Tenn. Code Ann. §§ 49-6-101 et seq.: yes, comply with Article XI, Section 5. Funded only after scholarship priorities; capped at $25 million per fiscal year under § 49-6-110.
• Pre-K longitudinal study under § 49-6-109: yes, these are administrative expenses reasonably necessary to administer the pre-K program.

After-school programs (Article XI, Section 5 priority #2)

• LEAP (Lottery-for-Education After School Programs) grant fund under Tenn. Code Ann. §§ 49-6-701 et seq.: yes, comply with Article XI, Section 5. Funded only when scholarship programs are first funded; must supplement, not supplant non-lottery educational resources.

K-12 capital outlay (Article XI, Section 5 priority #2)

• Energy Efficient Schools Initiative of 2008 under Tenn. Code Ann. §§ 49-17-101 et seq.: yes, projects funded under this act fall within the constitutional category of capital outlay projects for K-12 educational facilities, as long as scholarship allocations come first.

The AG opinion is anchored in two interpretive principles. First, the constitutional priority for post-secondary financial assistance is firm: only after that priority is funded can "excess" lottery proceeds be appropriated to the other categories (Op. Tenn. Att'y Gen. 03-015). Second, the "supplement, not supplant" requirement applies across the board: lottery proceeds must add to non-lottery resources, not replace them. Within those guardrails, the legislature has substantial discretion, and a long-standing legislative construction of the Constitution (which appropriations reflect) is entitled to substantial judicial deference. American Civil Liberties Union of Tennessee v. Darnell, 195 S.W.3d 612, 627 n.12 (Tenn. 2006).

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Why are some parts of the XAP contract approved and others rejected?

The constitutional limit is that net lottery proceeds must "provide financial assistance to citizens of this state to enable such citizens to attend post-secondary educational institutions located within this state" or fall into the other authorized categories. The AG distinguished components of the contract that directly facilitate lottery scholarship administration (information about TN higher education institutions, financial-aid planning, transcript transmission to TSAC for GPA verification) from components that are useful education-planning tools but do not directly serve the lottery scholarship program (general career-planning tools, middle-school modules, life-long portfolios). The first set may be funded from net lottery proceeds as reasonably necessary administrative expenses; the second set cannot.

What does "supplement, not supplant" mean in practice?

It means lottery proceeds cannot be used to replace non-lottery funds that the state was otherwise spending on the same educational purposes. The Constitution itself uses both phrases. If, before the lottery, the state funded a pre-K program at $X million from general appropriations, lottery proceeds cannot be used to drop that general-appropriation funding to $X million minus lottery contribution; the lottery has to be on top of what was already spent.

Are interest earnings on the lottery-for-education account "net proceeds"?

The AG noted in passing that earnings on the account, distinct from the direct lottery sales revenue net of expenses, may not be "net proceeds of the lottery's revenues" under Article XI, Section 5 (citing Op. Tenn. Att'y Gen. 03-066). Either way, when those earnings are spent on the post-secondary financial assistance category (such as the Tennessee Student Assistance Awards), they comply with the constitutional restriction. But the technical question whether interest is part of "net proceeds" matters for spending categories that are not within the constitutional list.

Does the legislature have to spend everything on scholarships before doing anything else?

Yes, in priority order. Article XI, Section 5 says "net proceeds" must first be allocated to provide post-secondary financial assistance; only "excess" after that goes to capital outlay or early-learning/after-school. The 2003 AG opinion (03-015) read "excess" to mean net proceeds remaining after the scholarship priority is funded. So the legislature cannot, for example, divert lottery proceeds from scholarships to fund a pre-K expansion; the scholarship priority must be met first.

What's the role of the Tennessee Education Lottery Corporation in all this?

The Corporation operates the lottery, pays its operating expenses from gross lottery proceeds, and transfers net proceeds to the lottery-for-education account in the State Treasury under Tenn. Code Ann. § 4-51-111. The Constitution and the statutes then govern how the legislature appropriates from the lottery-for-education account. The Corporation does not control the appropriation; the General Assembly does, subject to constitutional limits.

Why are unclaimed lottery prize moneys handled differently?

Tenn. Code Ann. § 4-51-123(h) provides that unclaimed lottery prize money deposited in the after school account is not "net lottery proceeds" for purposes of § 4-51-111(a)'s distribution rule. But Op. Tenn. Att'y Gen. 03-066 concluded that it is still "net proceeds of the lottery's revenues" subject to Article XI, Section 5's constitutional spending limits. So unclaimed prizes can be spent on after-school programs, but only if those programs comply with the constitutional restrictions (supplement-not-supplant; only after scholarship priority is funded).

Background and statutory framework

Article XI, Section 5 of the Tennessee Constitution provides:

The legislature shall have no power to authorize lotteries for any purpose, and shall pass laws to prohibit the sale of lottery tickets in this state, except that the legislature may authorize a state lottery if the net proceeds of the lottery's revenues are allocated to provide financial assistance to citizens of this state to enable such citizens to attend post-secondary educational institutions located within this state. The excess after such allocations from such net proceeds from the lottery would be appropriated to:
(1) Capital outlay projects for K-12 educational facilities; and
(2) Early learning programs and after school programs.
Such appropriation of funds to support improvements and enhancements for educational programs and purposes and such net proceeds shall be used to supplement, not supplant, non-lottery educational resources for educational programs and purposes.

The implementing statutes:

• Tenn. Code Ann. § 4-51-111 governs the disposition of lottery revenue. The Tennessee Education Lottery Corporation pays its operating expenses from gross proceeds (subsection (a)(2)) and transfers net lottery proceeds to a lottery-for-education account within the State Treasury (subsection (b)). Several reserve and subaccounts are established within the lottery-for-education account.
• Tenn. Code Ann. §§ 49-4-901 et seq. govern the HOPE Scholarship Program and related lottery-funded scholarships. TSAC (Tennessee Student Assistance Corporation) administers them; THEC (Tennessee Higher Education Commission) evaluates them. Tenn. Code Ann. § 49-4-903.
• Tenn. Code Ann. § 49-4-924(e) explicitly authorizes administrative costs incurred by TSAC and THEC in administering lottery-funded programs to be paid from the lottery-for-education account.
• Tenn. Code Ann. § 49-4-930(f) establishes the dual enrollment laptop pilot program, with grants of up to $500 per student for 100 students per grand division, codified following 2008 Tenn. Pub. Acts ch. 1142, § 26.
• Tenn. Code Ann. § 49-4-932 authorizes Lottery Scholarship Day. Subsection (j) authorizes administrative costs of the Department of Education and TSAC to be funded from the lottery-for-education account.
• Tenn. Code Ann. §§ 49-6-101 et seq. govern the pre-kindergarten program, with appropriations capped at $25 million per fiscal year (§ 49-6-110) and a supplement-not-supplant rule (§ 49-6-107(e)).
• Tenn. Code Ann. §§ 49-6-701 et seq. govern the LEAP after-school grant program, funded from the after school account (Tenn. Code Ann. § 4-51-111(f)).
• Tenn. Code Ann. §§ 49-17-101 et seq. establish the Energy Efficient Schools Initiative of 2008, authorizing grants and loans to K-12 school systems for qualifying capital outlay projects on energy efficiency.

The interpretive framework:

• Cleveland Surgery Center, L.P. v. Bradley County Memorial Hospital, 30 S.W.3d 278, 281 (Tenn. 2000): the fundamental purpose in construing a constitutional provision is to ascertain and give effect to the intent and purpose of the people who adopted it.
• Barrett v. Tennessee Occupational Safety and Review Commission, 284 S.W.3d 784, 787 (Tenn. 2009): courts give terms their ordinary and inherent meaning.
• ACLU v. Darnell, 195 S.W.3d 612, 627 n.12 (Tenn. 2006) (quoting LaFever v. Ware, 365 S.W.2d 44, 47 (1963)): a construction of the Constitution adopted by the legislative department and long accepted is entitled to great weight.
• Op. Tenn. Att'y Gen. 03-015 (February 10, 2003): "excess" in Article XI, Section 5 refers to net proceeds remaining after the post-secondary scholarship priority is funded.
• Op. Tenn. Att'y Gen. 03-066 (May 22, 2003): "net proceeds of the lottery's revenues" means funds remaining from the gross proceeds after all expenses and losses are deducted.
• Op. Tenn. Att'y Gen. 06-111 (July 13, 2006): prior review of an amendment to the THEC/XAP contract.
• Op. Or. Att'y Gen. OP-6373, 1991 WL 543950 (April 9, 1991): persuasive Oregon AG opinion on whether lottery funds may pay administrative expenses of a lottery-funded program.

The AG applied these standards to the documents accompanying the request (multi-year appropriation spreadsheets, scholarship program summary reports, the Tennessee Education Lottery Scholarship Program Annual Report, THEC and TSAC expenditure breakdowns, the THEC/XAP contract). Each expenditure was matched against the constitutional priority list (post-secondary financial assistance first; then K-12 capital outlay; then early-learning and after-school) and the supplement-not-supplant rule.

Citations

• Tenn. Const. art. XI, § 5 (lottery proceeds spending restrictions)
• Tenn. Code Ann. § 4-51-111 (lottery revenue disposition)
• Tenn. Code Ann. § 4-51-111(a) (distribution rule)
• Tenn. Code Ann. § 4-51-111(b) (transfer to lottery-for-education account)
• Tenn. Code Ann. § 4-51-111(f) (after school account)
• Tenn. Code Ann. § 4-51-123(h) (unclaimed prize money)
• Tenn. Code Ann. §§ 49-4-101, et seq. (educational financial assistance generally)
• Tenn. Code Ann. §§ 49-4-301, et seq. (Tennessee Student Assistance Award Program)
• Tenn. Code Ann. §§ 49-4-901, et seq. (HOPE Scholarship and related programs)
• Tenn. Code Ann. § 49-4-901 (allocation priority for early learning)
• Tenn. Code Ann. § 49-4-902(9) (dual enrollment grant definition)
• Tenn. Code Ann. § 49-4-903(a) (TSAC administration)
• Tenn. Code Ann. § 49-4-903(b) (THEC evaluation)
• Tenn. Code Ann. § 49-4-924(e) (administrative costs from lottery account)
• Tenn. Code Ann. § 49-4-930(f) (dual enrollment laptop pilot)
• Tenn. Code Ann. § 49-4-932 (Lottery Scholarship Day)
• Tenn. Code Ann. § 49-4-932(j) (administrative costs of Scholarship Day)
• Tenn. Code Ann. § 49-4-940(c) (transfer to energy efficient schools fund)
• Tenn. Code Ann. §§ 49-6-101, et seq. (pre-kindergarten program)
• Tenn. Code Ann. § 49-6-104(a)-(b) (program eligibility and requirements)
• Tenn. Code Ann. § 49-6-105 (LEA application)
• Tenn. Code Ann. § 49-6-107(e) (supplement-not-supplant)
• Tenn. Code Ann. § 49-6-109 (pre-K longitudinal study)
• Tenn. Code Ann. § 49-6-110 ($25 million cap)
• Tenn. Code Ann. §§ 49-6-701, et seq. (LEAP after-school grants)
• Tenn. Code Ann. § 49-6-701(a) (supplement-not-supplant for after-school)
• Tenn. Code Ann. § 49-6-706 (administrative costs from LEAP fund)
• Tenn. Code Ann. §§ 49-17-101, et seq. (Energy Efficient Schools Initiative of 2008)
• Tenn. Code Ann. § 49-17-102(5) (project requirements)
• Cleveland Surgery Center, L.P. v. Bradley County Memorial Hospital, 30 S.W.3d 278 (Tenn. 2000)
• Barrett v. Tennessee Occupational Safety and Review Commission, 284 S.W.3d 784 (Tenn. 2009)
• American Civil Liberties Union of Tennessee v. Darnell, 195 S.W.3d 612 (Tenn. 2006)
• LaFever v. Ware, 211 Tenn. 393, 365 S.W.2d 44 (1963)
• Op. Tenn. Att'y Gen. 03-015 (February 10, 2003)
• Op. Tenn. Att'y Gen. 03-066 (May 22, 2003)
• Op. Tenn. Att'y Gen. 06-111 (July 13, 2006)
• Op. Or. Att'y Gen. OP-6373, 1991 WL 543950 (April 9, 1991)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-020.pdf

Original opinion text

Full opinion text unavailable from the official source. See the linked PDF or landing page above for the complete text.