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Reason Foundation

State Lottery Revenues Take a Hit; Feds Continue to Block Lottery Privatization

Leonard Gilroy
August 10, 2009, 2:22pm

As detailed in Reason Foundation's Annual Privatization Report 2009, the number of states looking at potential long-term leases of state lotteries dropped from around a dozen in early 2008 to practically none by the end of the year after the U.S. Department of Justice issued an opinion suggesting that such arrangements may run afoul of federal law.

But as Conor Dougherty at The Wall Street Journal writes today (subscription required), state revenues from gaming are falling for the first time amid the current recession, leading me to suspect that some of those dozen states are wishing that the feds would get out of the way and let them get out of the direct business of running their lotteries before things get worse:

States' revenue from casinos, slot machines and lotteries is falling for the first time in many of the 48 states that have grown to depend on gambling as a crucial source of income.

Revenue contributed by commercial casinos to state and local governments was down 2.2% in 2008, to $5.7 billion, according to the American Gaming Association, an industry trade group. In many states, the declines have continued. [...]

Many lotteries also are hurting. In a sampling of 20 state lotteries, including California and Illinois, 14 had year-over-year drops in revenue for the fiscal year ended in June, according to Rockefeller Institute.

It is a harsh reversal for states that had come to count on the gambling industry's rapid expansion to provide steady revenue growth. States saw total gambling revenue including casino games, lotteries and horse-racing wagers rise 65% from fiscal year 1998 to $23.9 billion in 2008. Overall state revenue over the same period grew to $774 billion, up 65%.

But now, the weak economy and rising unemployment are combining with heavier competition among casinos to shrink the number of gamblers and the size of their wagers. The declining gambling revenue adds to falling sales- and income-tax receipts that have forced states to slash spending as they try to balance budgets.

"Gambling revenues are declining across the board, and states can no longer count on gambling when it comes to closing budget gaps," said Lucy Dadayan, a senior policy analyst at the Rockefeller institute.

What this article perhaps best illustrates are the revenue risks states face in this sort of business enterprise, and in a hypothetical, long-term state lottery lease, these risks would almost surely be transferred to the private concessionaire and away from the public sector. Of course, private bidders would certainly factor current revenue trends into their bids, which might have the effect of lowering the potential overall value of any upfront payment for a long-term lottery lease (relative to what a state might have received in 2007 or 2008).

But still, the current state budget woes demand policymakers have all tools at their disposal, and there's nothing inherently governmental about running a lottery or any other gaming system. As long as the state still retains regulatory control over the lottery—which it would never relinquish in a long-term lease—then the feds should have no problem with it in my view.

For more on the current landscape for state lottery privatization, see Reason's Annual Privatization Report 2009.

» Reason Foundation's Privatization Research and Commentary


Leonard Gilroy is Director of Government Reform


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