USDOJ Opinion a Setback to State Lottery Privatization, Daniels Drops Plan

Today, Indiana Gov. Mitch Daniels dropped his proposal to fund a new college tuition program by monetizing future Hoosier Lottery revenues, either through a long-term lease to a private sector investor-operator or by bonding against future revenue growth. This comes after the USDOJ issued an opinion that state lottery privatization would run afoul of federal law:

The ruling said that federal law requires that a state exercise actual control over all significant business decisions made by a lottery enterprise and retain all but a minimal share of the equity interest in the profits and losses of the business. It also said a state had to retain the rights to the trademarks and other unique intellectual property or essential assets of the state’s lottery. “It is permissible under the exemption for a State to contract with private firms to provide goods and services necessary to enable the State to conduct its lottery, including management services,” the opinion stated.

Many of them already do that. They’re trying to move beyond that simple contracting model to the realize the significant benefits available through long-term concession arrangements (large upfront payments, operational efficiencies, professional management and superior marketing, etc.). This approach would be new for the United States, but has been in place for years in Australia, the UK, and other countries (Turkey is in the process of privatizing their lottery right now). Gov. Daniels’ advisors researched the matter and came to a different interpretation than USDOJ:

Daniels said in a statement that he was surprised by the opinion from the Justice Department’s Office of Legal Counsel. “The best legal advice available to us had suggested that the OLC would not interpret federal lottery statutes as preventing the long-term lease of state lotteries,” he said. He said although the opinion is not binding, it seemed wiser to look at other options his administration has been exploring to fund his Hoosier College Promise Proposal.

I’ll be digging into this and commenting more in coming days and weeks as this develops. If you missed it, check out the lottery privatization recap in Reason’s Annual Privatization Report 2008. Reason’s Annual Privatization Report 2008 Reason’s Privatization Research and Commentary UPDATE: More from Reuters here.