Privatizing the State Lottery

An AB reader alerts us to an interesting story from Charles Duhigg and Jenny Anderson:

The state of Illinois yesterday took the first steps in selling its state lottery system, hoping to attract as much as $10 billion from investors who, in return, would own a monopoly that could turn out to be the biggest jackpot yet. The sale, which may occur as early as the spring, would not be the first privatization of public property – both Chicago and Indiana have recently earned billions of dollars by signing long-term leases with private companies to run toll roads. But the proposed lottery sale is almost certain be one of the largest privatizations of a state-run program, and it raises concerns that states, some of them critically short of cash, are selling valuable assets that could otherwise provide consistent streams of revenue. Under the proposed sale, Illinois would receive a multibillion-dollar one-time payment, and the lottery’s new owners would receive all revenue and profit for 75 years. Indiana is also considering selling its lottery, and bids are due later this month. That sale is expected to raise more than $1 billion upfront and annual payments of $200 million. Midway Airport in Chicago, toll roads in Pennsylvania and the New Jersey Turnpike are all potentially on the block.

So what are the business considerations here? If the present value of expected future profits exceed the price received by the state – then these are bad deals for taxpayers. I bet some folks will say that there is some efficiency gain to be had by privatization:

Illinois officials say selling the lottery, which collected revenue of about $2 billion and profits around $630 million last year, will give the business marketing and technological heft that the government cannot now provide. “This is fundamentally a retail business, and governments are not equipped to manage retail businesses,” said John Filan, the chief operating officer of the state of Illinois. “Gaming is getting so competitive around the world that we’re worried our revenues could go down unless there is retail expertise.”

Anyone wish to challenge this premise?

Opponents of lottery privatization disagree. They argue that many states, including California, New York and Florida, have hired companies like GTech, of Providence, R.I., to run their lotteries, gaining private-industry expertise without selling a valuable asset. Despite its public ownership, Illinois increased its lottery’s revenue by more than 15 percent from 2003 to 2005, according to the North American Association of State and Provincial Lotteries. “These are very healthy businesses,” said Melissa Kearney, an assistant professor of economics at the University of Maryland. “It’s unclear exactly what is gained by selling a lottery, except for a huge pot of money that legislators can start spending right away.” Other critics say there is also a risk of selling the lottery for too little. “If it turns out this thing is worth more than $10 billion, then they’ve denied future citizens hundreds of millions of dollars in tax revenues just so they can temporarily plug a hole in the dike,” said Dave Schulz, director of the Infrastructure Technology Institute at Northwestern University and Chicago’s budget director in the mid-1980s.