Gov. may gamble on privatized lottery

Times Staff Writer

Gov. Arnold Schwarzenegger is poised to call for privatizing the state lottery, a move that would bring California a cash infusion of as much as $37 billion to help solve pressing budget problems but also could sacrifice a major revenue source for decades to come.

The lottery would be leased to a private company for up to 40 years in exchange for a lump-sum payment or series of payments, according to documents from the governor’s budget office that were provided to legislative staff and obtained by The Times. If lawmakers were to sign off on such a plan, California could become the first state to privatize its lottery.

Schwarzenegger will issue a revised budget proposal Monday that is expected to contain the lottery plan.


Adam Mendelsohn, Schwarzenegger’s communications director, confirmed that the governor’s staff had been working with investment banks on the plan. He said private companies could do a better job of running the lottery than the state, resulting in more Californians playing and the largest possible cash infusion.

“California has one of the lowest-performing lotteries in the country,” he said. “Taxpayers could see two to three times more money go into state coffers.”

Mendelsohn also said any plan the governor proposed would not diminish the size of lottery payments now allocated to public schools, which received nearly $1.3 billion from the lottery in fiscal 2006.

California’s lottery was created in 1984 after 58% of voters approved an initiative drafted and bankrolled by the company Scientific Games, which soon after won the initial, $40-million state contract to provide the tickets. The ballot measure mandated that 34% of revenue created by the lottery go to public schools. Lottery sales last year totaled more than $3.5 billion.

Legislative leaders said they would not comment on the proposal until after it had been made public.

The plan is certain to be controversial, with opposition likely from activists who are seeking to stop further expansion of gaming in the state, as well as fiscal conservatives who are uneasy with trading off future revenue for easy cash now. But it also is likely to entice both Democrats and Republicans desperate to find funding for programs they support without having to resort to a tax hike.


It comes at a time when the state is facing only a modest budget deficit for the coming fiscal year -- about $1 billion. But billions more in bond payments will be due soon after.

The weakened housing market, an unexpected decline in income taxes earlier this year and an uncertain economic outlook are adding to budget pressures.

Those pressures are also raising concerns about whether the state can afford to proceed with the bold policy priorities set by the governor and many lawmakers, such as universal healthcare and massive public works spending.

Proposals for privatizing the lottery that were drafted by investment banks, including Goldman Sachs and Lehman Brothers, suggest that the move would solve many of the state’s fiscal challenges in one fell swoop -- with cash to spare.

That same sales pitch, however, has been made in other states, and none has followed through on the proposals so far.

Legislators in Texas are balking at a proposal by Gov. Rick Perry to use $14 billion in lottery payments for low-cost health insurance for the uninsured and for cancer research, among other programs. Texas lawmakers are growing concerned that the state, which has turned over much of its road-building operations to the private sector, was privatizing too many assets too fast.


Efforts in Indiana and Colorado to privatize lotteries also stalled.

“The question that keeps coming up in these states is whether this would be doing something with long-term consequences for short-term gain,” said Arturo Perez, a fiscal analyst with the National Conference of State Legislatures.

The California proposal is most likely to mirror one being pushed in Illinois by Gov. Rod R. Blagojevich. That sale would provide Illinois with $10 billion in return for handing over the lottery to a group of investors that would keep all of its proceeds for 75 years. The state would use the money to help cover the cost of bringing its pension system, which is running a multibillion-dollar deficit, into the black.

Proponents of a sale point out that Californians spend less of their income on lottery tickets than residents of most other states -- meaning less money is generated for schools and other government programs. According to state documents, residents here spend, on average, $81 per year. In New York and Georgia, per-capita spending on the lottery averages more than $300.

The proposals drafted by the investment banks suggest that California could spend the money to pay off debt coming due through 2010 -- including the remainder of the $10.9 billion California borrowed to balance the budget soon after Schwarzenegger first took office.

“This would provide significant budgetary relief in the coming fiscal years, helping address challenges posed by declining revenues and demands for new spending,” one draft proposal says.

Although administration officials said the governor’s spending plan does not rely on money from privatizing the lottery to bring the state budget into balance in the coming fiscal year, the banks promoting a lottery sale said proceeds could become available as soon as February 2008.


That, however, could take some complicated legal maneuvering. There are constitutional restrictions on how lottery money is divvied up.

Changing those rules could require a vote of the people, something that might not happen until November 2008 at the earliest.

Some say there is good reason not to move too fast.

“It’s very tempting. But I’m not sure these states understand what they would be signing off on,” said Edward Ugel, author of “Money for Nothing: One Man’s Journey Through the Dark Side of Lottery Millions.” The book is an account of his career talking lottery winners into turning over their prizes, which were paid out over many years, to private companies in exchange for lump sums.

“You are relying on politicians to make decisions for people who will be left holding the bag decades from now,” he said. “There are no givebacks on this.”