Out of Control Policy Blog

State Lottery Privatization Update

According to Reason's Annual Privatization Report 2008, the idea of privatizing state lotteries has been gaining steam over the past several years. In 2008, over a dozen states saw proposals to close budget gaps and increase state revenues through long-term lease agreements or concessions, for state lottery systems. While the idea of private investor/operators offering large upfront lumps of cash for lottery concessions has certainly generated tremendous interest among state elected officials, thus far no state has sealed the deal.

Under the various proposals, private companies would compete for the rights to operate a lottery on behalf of the state through a long-term (30+ year) concession, while the state would continue to own the lottery and retain a strong regulatory role. In some states this means maintaining strict controls over the types of new game products, how games are marketed and minimum prize payout ratios. The lottery concession proposals discussed thus far–and implemented globally in Australia, the United Kingdom and elsewhere–have been conceptually similar to the types of long-term leases seen in other realms of public infrastructure, such as toll roads, seaports and airports.

There's a great deal of flexibility in how a lottery concession could be structured. For instance, investors could give a large upfront payment in exchange for the rights to the lottery's future revenues over the length of the term. The upfront payment would be placed in trust funds or perhaps invested in the state pension fund, the interest from which could be used to finance education, fund transportation projects or cover budget shortfalls.

An alternate structure that may be more politically palatable would be to structure a concession with a modest upfront payment and a guaranteed portion of the lottery's annual revenues. Revenue sharing provisions are also an option if policymakers want to ensure that the state benefits if lottery revenues exceed certain thresholds in boom years.

Leonard Gilroy is Director of Government Reform


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