Governor Perry’s Plan to Privatize the Texas Lottery

CBS Evening News covered this story, which was reported on February 2, 2007 (yes Groundhog Day) by Emily Ranshaw of the Dallas Morning News:

Lawmakers on both sides of the aisle raised doubts Friday about Gov. Rick Perry’s proposal to privatize the Texas lottery, saying the state shouldn’t sell off assets to meet basic budget needs. Mr. Perry declined to comment on the idea, but he told the Austin American-Statesman this week that he would ask the Legislature to sell the lottery to private parties to raise money for health care and research efforts. He is expected to unveil this plan during Tuesday’s State of the State address to lawmakers. But some lawmakers on committees that oversee lottery issues said that they think the plan is bad policy and that the state should simply raise the revenue if it needs to fund more health programs. Others said they wouldn’t comment until they had heard the full proposal. Selling core state assets, particularly income-producing assets like the lottery, is a very short-term solution to a long-term problem,” said Sen. John Carona, R-Dallas, who serves on the Senate’s State Affairs Committee. Proposals to privatize the state lottery aren’t unique to Texas. Illinois, Indiana, Michigan and Washington, D.C., have all considered turning over their lotteries to private companies under long-term leases that would include lump-sum payments to the state and, in some cases, annual royalties. So far, none of the 42 states that operate lotteries has approved such a sale. Privatization is attractive because the large upfront payments could be used to dig states out of financial crises, or to fund health or education programs. Illinois, for example, hopes to get up to $10 billion upfront to lease the state lottery system. And it’s a reasonable option for those who don’t think the state ought to be in the business of running a gambling operation. In general, day-to-day lottery operations are already farmed out to private companies. But it’s also hotly contested. Texas’ history of privatizing services is spotty at best – a point highlighted by problems thousands of poor families have had renewing their children’s health coverage using privately run call centers. Opponents of privatization say taking the government out of the picture could lead to corruption or fraud. And while the lump-sum payment is a draw, some privatization opponents say that eventually, more revenue will be going to a private company and less to the state. “What it’s doing is handing out crown monopolies to favored individuals, and probably not doing it in a way that is economically justified nor fair to the Texas citizenry,” said Earl Grinols, a Baylor University economist. The Texas lottery contributed $1 billion to the state’s revenue last year. And while it’s gone through some trying times, Rep. Ismael “Kino” Flores said that today, it’s “one of the best-run lotteries around.”

Ms.Ranshaw did a nice job starting with the complaint put forth by Senator Carona and Baylor economist Earl Grinols. CBS News also noted that this lottery contributed around $1 billion in revenues and claimed that the Governor is only asking for $14 billion for this asset.

Even if one is bothered by the government running a gambling operation, one would think the state could get a better price. Let’s illustrate by assuming a 4.91% long-term nominal interest rate and a 2.6% expected inflation rate (consistent with the long-term real rate of 2.25% as reported here). If real revenues stay the same (nominal revenues rise by 2.6% per year), the present value of 75-years worth of revenues is over $35 billion. If some private investors purchased these cash flows for only $14 billion, the expected return to this investment would be 9.2%. A sweet deal if one can convince one’s political friends to give it to you.