In 1984, the California Constitution authorized the establishment of a statewide lottery. As an initiative statute, the California State Lottery Act (Act) of 1984 created the California State Lottery Commission and gave it broad powers to oversee the operations of a statewide lottery. The primary purpose of the Act was to provide supplemental monies to benefit public education without the imposition of additional or increased taxes. The Lottery is administered by a five-person Commission appointed by the Governor and confirmed by the State Senate.

The Act required that 50 percent of total annual revenues be returned to the public in the form of prizes and at least 34 percent of total revenues be allocated to the benefit of public education. No more than 16 percent of total revenues were to be used for administrative costs. Those revenues were allocated to public education and placed in a special fund, known as the California State Lottery Education Fund, which was appropriated for the benefit of public education and which held revenues until they were allocated on a per capita basis, using prior year certified Average Daily Attendance data, to the following categories: K-12 education, Community Colleges, the California State University, the University of California, and other educational entities. In the 23 years since sales began in October 1985 through June 30, 2008, the California State Lottery has raised over $20 billion for public education.

A June 2009 Special Election will contain a ballot measure making various changes to the Act that will help to improve the Lottery's financial performance, with the General Fund ultimately benefiting from this improved performance. The measure will replace annual payments from Lottery revenues to K-12 and higher education with allocations from the General Fund, beginning in 2009-10. General Fund allocations to K-12 and higher education would be based on the amount of Lottery revenues received in 2008-09, adjusted for inflation and changes in attendance. The measure would also make several changes to the Lottery, including authorizing an increase in prizes as a share of Lottery revenues and authorizing securitization of a portion of future Lottery revenues. The securitization proceeds will be deposited into a newly-created Debt Retirement Fund and available for various purposes that will help offset future General Fund expenditures.