Report: Tennessee’s lottery-funded scholarship program faces revenue shortfalls

The advent of sports wagering in Tennessee is at least partially responsible for the drop in lottery ticket revenue, a University of Tennessee professor told lawmakers in March. And the sports gambling proceeds that backstopped the lottery’s scholarship programs are now also steered toward construction and maintenance for K-12 schools after Tennessee lawmakers struck a deal to secure the votes needed to pass a statewide private school voucher program in 2025.

The Tennessee Education Lottery Scholarship system offers 12 programs funded directly through lottery revenue to students pursuing two- and four-year degrees, workforce certificates and credentials. Another program, Tennessee Promise, is funded by a $1.3 billion endowment, but also historically received surplus funds from the lottery.

In 2025, the 13 programs together spent $505 million supporting 169,412 students. This also marked the first time that lottery proceeds fell short of scholarship spending, creating a multi-million-dollar funding gap.

These programs fund merit-based HOPE scholarships for students, help high school students earn college credits before they graduate, allow adult and independent learners to return to Tennessee’s community colleges and technical schools for education, and fund scholarships benefitting students with intellectual disabilities and veterans.

The Tennessee Education Lottery recently announced fiscal year-end results that show an increase of $15.2 million toward education funding over the previous year.

But even if lottery proceeds grow faster than Tennessee’s scholarship spending over the next four years, proceeds will likely fall short of costs, the report states.

In previous years, any lottery proceeds left over after scholarships were paid for went toward the Tennessee Promise program, a “last dollar” program which gives high school graduates an opportunity to attend any community college, Tennessee College of Applied Technology or other eligible institution offering associate degrees for free by covering any remaining costs not paid for by other scholarship programs. Between 2022 and 2025, transfers to the Tennessee Promise program ranged between $124 million and $151 million. Now, such annual transfers are capped at $10 million.

If the lottery account no longer generates a surplus, this program too will receive less funding. And if funding for Tennessee’s other scholarship programs does fall, it could put more pressure on the Tennessee Promise program to fill in those gaps, according to the report.

Tennessee launched online-only sports betting in 2020, and the state designated those proceeds to the lottery’s college scholarship program as backup funds. With that money now going toward K-12 school construction, if lottery proceeds fall short of scholarship spending in the future — as they are projected to do — money would be pulled “dollar-for-dollar” from the construction and maintenance fund to cover the gap, the report states.

A new federal Workforce Pell grant, a needs-based program, may help offset costs of some short-term TCAT programs, the report notes. Other states facing shortfalls in lottery funding for scholarships have allowed retailers to accept debit cards instead of cash, or launched digital instant games in an attempt to improve lottery revenue. Some states supplemented lottery-funded scholarships with general fund allocations, and some switched to fixed, formula-based scholarship awards to keep costs from rising with tuition, the report states. But the report also says none of these approaches alone is enough to close Tennessee’s funding gap.

“Tennessee has built one of the nation’s strongest postsecondary scholarship systems, and that success has helped more students pursue education and training after high school,” Erin Hafkenschiel, president of ThinkTennessee, said in a news release. “By understanding the structural pressures on the system today, Tennessee can thoughtfully address these emerging funding challenges now in order to preserve access to postsecondary education for future generations.”

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