The New York Times-20080126-Questions Surround Idea of Privatizing the Lottery
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Questions Surround Idea of Privatizing the Lottery
Can New York hit the jackpot by selling its lottery?
Wall Street certainly thinks so. Ten investment banks that have lobbied state officials believe that the state could reap $25 billion to $45 billion now by agreeing to give up a share of future proceeds from its lottery system for the next three to four decades.
Wall Street's pitch is that a private investor would pay the state a premium for a part of the revenues and management control of the operation. Gov. Eliot Spitzer envisions using $4 billion as a systemwide endowment for the state's higher education system, then investing the rest of the money in a diversified fund aimed at yielding the roughly $2 billion now generated annually by the lottery system for kindergarten-through-12th grade education.
We should unlock some of the value of the New York State Lottery, either by taking in private investment or looking at other financing alternatives, Mr. Spitzer said in his State of the State address this month. As we do this, we will assure that the state continues to regulate all lottery games.
In essence, a private company, or more likely, a consortium, would be trying to make the state's lottery system more profitable over the next several decades by taking over management from state bureaucrats. To entice the state to go along, the private investors would have to pay a lump sum large enough to be worth the state's trouble.
Governors across the country have been tempted by the potential, but there has been criticism of proposals to use lump-sum payments to erase short-term budget gaps.
Gov. Jon S. Corzine of New Jersey briefly considered privatizing the lottery to try to erase his state's enormous debt, but instead has recently proposed to increase highway tolls over the next 15 years.
In Mr. Spitzer's proposal, the fund would be used to create an endowment, not to patch a problem. But it would inevitably be paid for by an expansion of gambling, which the private-sector partners would be expected to seek aggressively. New York's lottery already produces more annual revenue, about $6.8 billion, than any other state in the country. The lottery proposal is part of a broader plan the governor laid out this week to expand gambling, including a proposal to allow the Belmont Park horse track to install 4,500 video slot machines.
Potential concerns about the lottery plan boil down to two categories: Are state officials willing to accept an expansion of state-sponsored gambling if it helps provide financing for education? And what are the risks of such a deal? That is a question that is hard to answer until more details emerge.
This is an idea that I would say every major Wall Street firm has come to us and said, 'You really should consider it,' said Paul Francis, the governor's operations director and an architect of the budget effort.
Of course, Wall Street's credibility is not exactly at a high point, especially when it comes to financial engineering. The complex instruments that the major investment banks built around subprime mortgages have blown up in their faces, leading to tens of billions of dollars in losses. This deal appears less complex -- no derivatives involved --but while it has been considered in a number of other states, it has never won legislative approval.
Lawmakers are not rallying around the idea, and many are eager to see a more detailed proposal.
Sheldon Silver, the Assembly speaker and the Legislature's top Democrat, expressed reservations about both the lottery proposal and the governor's plan to impose a ceiling on local property tax increases, another major source of aid for local school spending.
In the end, what is it we are actually doing? Mr. Silver asked of the lottery proposal. Are we tapping funding for K-12? That and tax caps, that's two hits on K-12. Again, I'm not a financial wizard, but the logic of it I'm still trying to figure out.
John McArdle, a spokesman for the Senate majority leader, Joseph L. Bruno, the state's top Republican, said: This kind of proposal is being bandied about as a source of revenue, but it's never been attempted. Forgetting whether or not it's a good idea from a public-policy standpoint, there's an awful lot of questions.
The idea of long-term leases of public assets surfaced in 2005, when Chicago leased its Skyway to a foreign consortium for the next century in exchange for a $1.8 billion payment. The lottery proposal is Wall Street's latest spin on the concept, and other states, including California, Illinois and Florida, have flirted with various approaches. The proposals have ranged from leasing as much as 100 percent of a lottery system to a private company to the more modest step of allowing a private company to have a share of future profits above a certain threshold.
I think it's far more likely that the state would propose a transaction in which the state retained a very large percentage of the continuing upside of the lottery; whether it was 49 percent, or whether it be 51 percent, that's the kind of thing that would have to be analyzed, said Mr. Francis, a former corporate financial officer.
The Spitzer administration plans to hire a small investment bank to explore the idea; if the governor decides to go forward, the proposal will need legislative approval. A large investment bank would then be hired to market the deal and structure it, a role that would yield that bank tens of millions of dollars in fees.
From the governor's perspective, it is not hard to see the temptation.
He has made it a priority to improve the State University of New York, which lacks the endowments of more prominent university systems in states like Texas. But there is little money available. Not only is the economy taking a gloomy turn, but also, the financial industry's recent losses are terrible news for New York. One-fifth of the state's revenue comes from Wall Street through taxes on bonuses, income, capital gains or large real estate transactions.
So, in one sense, the governor is turning to Wall Street financial engineering in part to alleviate a problem caused by Wall Street financial engineering.
Still, the governor is confident the endowment could generate hundreds of millions of dollars a year for New York's state and city universities and help pay for initiatives like a Spitzer plan to hire 2,000 new professors.
The finest private and public colleges and universities in America use the funds from permanent endowments to achieve excellence, he said in his State of the State address. If we are to join their ranks, we must do so as well. Higher education funding should no longer be a budgetary pawn or a yearly battle. It must be a permanent priority.
But his plans to pay for it face determined opposition.
Assemblyman Richard L. Brodsky, a Westchester Democrat, has been critical of wealthy politicians like Mr. Spitzer, Mr. Corzine and Mayor Michael R. Bloomberg for supporting large toll or fee increases -- or potentially increasing gambling operations.
It's Corzine, it's Bloomberg, it's Spitzer, he said. They increase user fees and sell off public assets, and the net result is an increased burden on middle-class people who use government systems. The big-business community, and the rich, escape.
[Illustration]PHOTOS: A shop in Bedford-Stuyvesant, Brooklyn, does brisk business in lottery tickets. New York's lottery has annual sales of $6.8 billion.; Governor Spitzer has proposed privatizing the lottery.(PHOTOGRAPHS BY CHRISTIAN HANSEN FOR THE NEW YORK TIMES)