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As
states across the nation seek ways to cut costs
and avoid tax and fee hikes to address growing
budget shortfalls, the idea of privatizing state
lotteries is gaining steam. Over a dozen states
— including Virginia, Vermont, and New York —
are currently considering proposals to lease state
lotteries to private sector investors. Given the
upside potential, this idea deserves serious
consideration from Commonwealth lawmakers.
Just
this month, Del. David Poisson, D-Sterling,
introduced HB 292, which would require the State
Lottery Board to complete an implementation study
on privatizing administration of the state lottery
and report its recommendations by the end of 2008.
The report would include an implementation plan to
complete the privatization by July 1, 2010.
The
proposals under consideration in a number of
states involve leases, not sales, of lottery
systems. A long-term concession agreement
(generally on the order of 30-40 years) would be
signed between the state and private investors to
establish the guidelines and expectations of both
parties. The private investors would operate the
lottery on behalf of the state, while the state
would still own the lottery and retain a strong
regulatory role, maintaining strict controls over
prize payout ratios, the types of new game
products, and how games are marketed.
Lottery
privatization makes sense in a number of ways.
First, it’s difficult to argue that running a
lottery is a core function of government. Put
simply, businesses are best at running businesses,
and governments are best suited to a regulatory
and oversight role to ensure that the public
interest is protected.
Next,
state lotteries have a fairly stable revenue
stream which can be maximized under private
management. Private operators would have the
incentive to introduce new, more popular games.
And since lotteries are retail- and sales-driven
enterprises -- not areas of public sector
expertise -- private sector operators would more
experienced and adept than government at using the
latest technologies to target games to markets and
generate more sales. With Virginia’s
constitutional mandate that lottery proceeds be
dedicated to education, this could mean more funds
flowing into education with a reduced need to
supplement them with state and local tax dollars.
Lastly,
privatization would provide a means to transfer
significant risks to private sector operators,
most importantly the risks from competition with
lotteries in adjoining states, casinos, and
internet gaming.
There’s
a great deal of flexibility in how a lottery
concession could be structured. For instance,
investors could give the Commonwealth a large
upfront payment (possibly in the billions of
dollars) in exchange for the rights to the
lottery's future revenues over the term of the
term. According to press reports, one alternative
under consideration in New York Gov. Eliot
Spitzer’s privatization proposal could involve
investors granting the state up to a $45 billion
upfront, lump-sum payment in return for all
lottery revenues over the lease term. The upfront
payment would be placed in trust funds, the
interest from which would be used to finance
education.
An
alternative structure that may be more politically
palatable would be to structure a concession in
which the Commonwealth collects a modest upfront
payment and a guaranteed portion of the lottery's
annual revenues. For example, the lottery
concession discussed in Indiana last year would
have involved a $1 to $2 billion upfront payment
and a guaranteed $200 million revenue-a-year
stream over the 30-year life of the lease to fund
college scholarships, pay down public pension
obligations, and support capital projects.
Revenue
sharing provisions are also an option if
policymakers want to ensure that the state
benefits if lottery revenues exceed certain
thresholds in boom years. This option would give
the state a share of upside revenues in boom
years; the greater the upside, the larger the
share.
While
a number of states have begun to explore lottery
privatization, no state has yet moved to
implementation. However, the success of lottery
privatization around the world — in Greece,
England, and a number of Australian provincial
governments, for example — has demonstrated that
private sector skill and efficiency can extract
more value out of lottery assets.
This
is not to say that lottery privatization would be
easy. It would require due diligence, detailed
legal and financial analyses, and a carefully
negotiated concession agreement that preserves a
strong, state oversight role while maximizing the
value of the asset. But with Virginia’s budget
crunch, it’s more imperative than ever to get
government out of the business of business and
back to focusing on its core, essential functions.
Lottery privatization would be a good step in that
direction.
--
January 28, 2008
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