So Many States For Sale: One Piece At A Time

Illinois Is Putting Lottery on Block for Quick Payoff

Illinois is following suit with a couple of other states in the trend to sell off assets and operations once seen as revenue centers in the long-term in favor of immediate gratification. In Indiana, Governor "Ditch Mitch" Daniels has sold off control of the Indiana Toll Road--I-80/I90--that runs from the northeast corner of the state bordering Ohio to the northwest corner bordering Illinois and bordering Michigan along the entire run. The City of Chicago leased out the "Skyway" that links the Indiana Toll Road to Chicago and other interstate connections that direct traffic flows much in the same manner as the Chicago railway hubs direct Amtrak, commuter and freight trains.

Mitch Daniels is also seeking to outsource the welfare and public aid functions based on the asinine reasoning that a private, non-governmental, for-profit entity can run these operations more efficiently and with less cost. But what Daniels is forgetting is that this model of farming out state functions has already proven disastrous in terms of farming out the operation of schools to private, for-profit entities. The most notable of these experiments was seen in the Baltimore area.

But now Illinois and Indiana have set an agenda of selling off the operation of their lottery games. One has to ask if this is in the best interests of the citizens? If we take a look at the history of private ownership of gambling enterprises, including many of those associated with Native American tribal lands, we find them riddled with accounting scandals, organized crime scandals, and bad management activities. So why would anyone really want to surrender the operation of lottery games to a private entity? The answer to that question lies in the sense of immediate gratification, a significant lack of common sense, abandonment of constitutional principles regarding the ownership of government by the people, and a failure to look at the long-term issues.

In the case of roadways, I still question the wisdom, as well as the legality, of surrendering our interstate roadways and infrastructure to foreign corporations in light of the federal and state tax dollars that went into creating those roads and structures, as well as violating the laws governing defense readiness and use of interstate highways for military transportation in case of national emergency.

In the case of the lotteries, I question the wisdom, as well as the long-term losses that it may develop. In every case of outsourcing I have ever seen, the terms of the initial agreements always get modified within 1 to 2 years because the parties involved failed to comprehend, and include, many considerations that end up costing more than first thought. Additionally, with private, for-profit entities, there is always pressure to increase revenues and profits that end up as increased fare, prices and decreased returns to anyone except the executives, lawyers and top stockholders.

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.

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.”

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.

But lotteries’ declining profitability could make a high price tag more attractive.

“Lotteries used to be highly profitable,” said Michael Jones, who ran the Illinois lottery from 1981 to 1985 and is now the director of Independent Lottery Research in Chicago. “Nowadays, that profitability as a percentage of sales has declined dramatically.”

Taking lotteries out of state hands, however, could raise tricky policy issues as private operators strive for maximum revenue.

“As a government agency, lotteries are bound by the duty of care that a government has to its citizens,” said Rachel Volberg, director of Gemini Research, based in Northampton, Mass. “A private operator is not bound by any duty of care.” Private lottery operators could be more likely to advertise aggressively, Ms. Volberg said, particularly among people susceptible to gambling addiction and those who can ill afford to spend money on lottery tickets.

Gov. Rod R. Blagojevich of Illinois, a Democrat, first floated the idea of privatizing the state’s lottery while seeking re-election last May. At the time, Mr. Blagojevich estimated that the sale’s proceeds would finance a four-year building and education plan for schools. Under the proposal, $6 billion would be set aside to provide the schools with $650 million a year for the next 18 years, slightly more than what they received last year in lottery income.

At the time he made the proposal, Illinois Republicans charged that his real motivation was to keep State Senator James Meeks, an independent from Chicago, from entering the gubernatorial race. Mr. Meeks, an influential black leader, had threatened a challenge if education financing was not increased..

Selling the Illinois lottery would require approval from the state Legislature, which, in turn would determine how the proceeds are spent.