Out of Control Policy Blog

Lottery Privatization Back on the Table in Illinois

Not to be outdone by Indiana Gov. Mitch Daniels' annoucement yesterday regarding the potential privatization of the Hoosier Lottery (see my post here), next door, Illinois House Speaker Michael Madigan re-opened the door to lottery privatization in the Prairie State :

A special legislative session in Springfield ended Wednesday night with no action on school funding or a capital plan. [. . .]

House Speaker Michael Madigan also announced he is taking a new look at a proposal to privatize the state lottery to pay for the capital plan, which would provide money to build roads, bridges and schools.

More details to come soon, hopefully. Illinois Gov. Rod Blagojevich is certainly supportive. He ignored last year's legislative defeat on lottery privatization in his 2008 State of the State address, saying that a "partial lease of the state lottery" would "help fund up to $10 billion of a $25 to 30 billion state construction program."

I had the opportunity to discuss state lottery privatization in this Fort Wayne Journal Gazette piece today:

Leonard Gilroy, director of government reform at the Reason Foundation, a free-market think tank in California, said other countries have embraced the idea but that states are slow to come on board.

He thinks it will take one blockbuster deal – similar to when Daniels leased the Indiana Toll Road for $3.8 billion – to move the concept along.

"The structural model is out there, but it's just a lot of legal, financial and budget details that haven't been hammered out," Gilroy said.

He noted that the primary argument boils down to states losing control. But he said the contracts governing a lease can be tighter than existing regulations.

"You can limit the types of games, minimum prize payouts, advertisement," Gilroy said. "In the end, private-sector businesses are better at running businesses than government. Is a lottery system a core function of government? Many would argue no. It's a business enterprise."

A few keys points to add here:

  • Whether you're talking lotteries, roads, or street sweeping, policymakers need to recognize a fundamental fact: you can actually gain more control through privatization than through public-sector service provision (see related post here). Indiana House Speaker Patrick Bauer offers a perfect example of a pervasive myth to the contrary: "With bonding, the state would keep control, therefore the public would keep control."

    Hardly. Under a concession, the state would still own the lottery and retain a strong regulatory role, maintaining strict controls over minimum prize payout ratios, the types of new game products, and how games are marketed. You can financially penalize the operator if they fail to live up to the terms of a strong, performance-based contract. When was the last time government was penalized for underperforming?

  • Running a lottery is not a core function of government. 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.

  • 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, if allowed under the agreement. And since lotteries are retail- and sales-driven enterprises, private sector operators would more experienced and adept than government at using the latest technologies to target games to markets and generate more sales.

  • In states like Virginia where you have lottery revenues constitutionally or statutorily dedicated to education or shoring up pension obligations, this could mean more funds flowing into those areas with a reduced need to supplement them with state and local tax dollars.

  • Like with a toll road, privatization would provide a means to transfer significant operational risks to a private sector concessionaire. For a lottery, the risks from competition with lotteries in adjoining states, casinos, and internet gaming would be a primary concern, for example.

For more on state lottery privatization, see the "Emerging Issues" section of our Annual Privatization Report 2008.

Leonard Gilroy is Director of Government Reform


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