The California Lottery recently announced that record sales had helped them generate nearly $1.3 billion for public schools over the past year. While other states are also hitting record lottery sales, some are starting to bet on the private sector to help grow their lotteries even further, an idea worth exploring in California too.
In the last two years, three states have turned over major parts of their lottery operations to private managers to deliver better returns. Unlike some forms of government contracting, the goal wasn’t to increase efficiency or cut internal costs. Many state lotteries are fairly lean to begin with. Rather, state-run lotteries often struggle to maximize revenues because they are often hampered by things like civil service laws that limit incentive pay that can be offered to sales staff.
The private sector is being tapped to help well-performing lotteries increase net revenues. This growth is coming from several fronts, including expanded sales and marketing staff, new product lines, improved marketing to attract new types of lottery players, and new outlets for lottery ticket purchases.
Illinois was the first state to turn to private lottery management. In 2011 Illinois signed a 10-year contract with a private consortium that committed to generating over $1 billion more revenue to Illinois than the state lottery projected it could earn on its own. The private manager is now responsible for handling lottery operations, management and marketing functions. If private group fails to hit its revenue targets, it has to pay a portion of the difference back to the state. The state’s in-house lottery employees kept their jobs, and the firm even hired additional private sector employees to augment operations.
The private manager brought in over $750 million in net revenue in its first year, a record high for the state and significant increase over the $690 million in the last year of state operation. But even that was short of its goal.
Indiana quickly followed Illinois’ lead, signing a 15-year agreement with a private firm to expand lottery marketing, sales, customer service and distribution services. The deal is expected to generate $500 million of additional net income for the state over the first five years. The private manager took over operations in July 2013 and, like Illinois, must have its annual business plans reviewed and approved by the state. According to former Gov. Mitch Daniels, “With this contract, the only question is how much more money Indiana will receive than under the current system.”
Earlier this month, a private manager took over the New Jersey Lottery’s marketing and sales functions in exchange for an upfront payment of $120 million and a commitment to generate over $1.42 billion in additional net income for the state over the 15-year contact. “We are outsourcing the management and marketing of the lottery,” New Jersey Gov. Chris Christie said. “The state still owns the lottery. The state still gets the income stream from the lottery.”
In California, the politics would obviously be tricky and would require the governor and legislature to get on the same page with government unions, the education establishment, and Native American gaming interests, for starters. But for a state government always hungry for more revenue, a path to more money —without raising taxes—by improving the management and marketing of the lottery, should be a no-brainer.
If blue states like Illinois, purple states like New Jersey, and red states like Indiana can find more lottery revenue by partnering with the private sector surely California can too.
Leonard Gilroy is director of government reform at Reason Foundation (reason.org). This article was originally published in the Orange County Register on October 24, 2013.