The Associated Press had a great piece of enterprise reporting earlier this week about how much money California could get for privatizing its lottery. Governor Schwarzenegger has been throwing around the figure $37 billion — a particularly nice number considering the state faces a $14.5 billion budgetary shortfall — but the AP got its hands on documents showing that $37 billion is on the very high end of what Wall Streeters think the lottery is worth. Lehman Brothers pegs the value somewhere between $16.1 billion to $37 billion over 40 years with about half of that paid up-front, while estimates from Bear Stearns, Citibank, Goldman Sachs, JP Morgan Chase and Merrill Lynch typically put the value of a long-term lease between $7 billion and $29 billion with up-front payments of usually less than $9 billion.
The idea of turning over lotteries to private investors, who can ostensibly squeeze out more value, is a popular one in statehouses these days. More than a dozen states are considering such deals, including New York, Florida and Massachusetts. Indiana and Illinois have come close to going private, but so far no state has.
It’s a pretty appealing set-up for a state, especially at a time when the economy is slowing and property values, which form the foundation of many local tax systems, are flat lining.
But as the California estimates show, no one really knows how much a lottery franchise is worth. Much of it depends on what a new private owner would be allowed to do. According to the AP, for the California lottery to command the highest prices being discussed, a new owner would have to be able to do things like sell tickets over mobile phones and PDAs, in malls, on college campuses, at bus stations and through ATMs. Whether or not we want a society in which we are constantly bombarded by enticements to gamble is a really important question that should be discussed out in the open – and not just because someone at the Associated Press was smart enough to file a public records request.
In October, I wrote a story about private investors buying long-term leases of toll roads. Toll roads and lotteries have similar cash-flow characteristics, so the people interested in leasing one tend to be interested in leasing the other. As I pointed out in that article, it makes a lot more sense for a state to turn to the private sector when it wants to build a new road, since the private investor can then assume some of the risk. You can do studies, but no one really knows how many drivers a new road will get or what kind of tolls will be collected until it’s built. For a state to not have to bear the weight of that financial uncertainty all on its own is incredibly useful.
A lottery, though, is a pretty sure thing. States already have systems in place and they know exactly how much they can make through ticket sales – in California, $3.3 billion a year. A private lessee can introduce innovations, like lotto tickets at ATMs, to boost sales, but there’s not really any reason why the state of California couldn’t simply choose to do those things on its own.
Except, perhaps, for political reality. A big appeal of signing over things like toll roads and lotteries to private investors is that politicians then avoid having to take controversial stands on issues like raising tolls and promoting gambling in shopping malls. Of course, the reason governments want to avoid having those conversations is the precise reason why we should be having them. These are hardly black-and-white issues. States need money to fund themselves. But are these the ways we want to drum up funding? It’s a question more people should be asking.