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Privatization of Texas lottery may get 2nd look in 2009

Apr 8, 2008, 10:42 am

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Texas Lottery

Texans could buy lottery tickets at the checkout lines in supermarkets and big-box department stores, at coffee shops and cabarets. They could pay with credit cards or personal checks and play online or the old-fashioned way with a ticket that's also a tiny ad for anything from soft drinks to sporting events.

Those are just some of the proposals offered to state officials by some of the nation's largest financial firms that have an interest in remaking the 16-year-old government-run Texas Lottery Commission into a market-driven enterprise operated by companies motivated more by the prospect of profits than the vagaries of politics.

Although the prospect of turning over Texas' $1 billion-a-year lottery to the private sector received the coldest of shoulders when Gov. Rick Perry first suggested it, a year ago, proponents have been busy laying the groundwork for a second, more concentrated push when lawmakers return to Austin in January for the 2009 legislative session.

"I seriously doubt at this point that they have one vote, much less the 100 they'll need [in the 150-member House], but they're already here visiting with folks to lay out their case," said state Rep. Warren Chisum, a Pampa Republican who heads the powerful House Appropriations Committee.

Chisum, whose committee is among at least three legislative panels to be tasked with at least looking at the feasibility of a closer partnership between the lottery and private enterprise, describes himself as very much a skeptic. He questioned whether lottery ticket sales could generate the billions of dollars that the investment firms say are out there and whether the capital markets want to take chances on state lotteries.

"It sounds very pie-in-the-sky — to me, anyway," Chisum said.

A lease, not a sale

States including Indiana, Massachusetts, New Jersey and California are considering a range of proposals for at least some privatization of their lotteries.

Representatives of the financial firms that have contacted Texas officials were reluctant to speak publicly about the proposals because they are considered rough drafts and much of the information is proprietary.

But material made available by Perry's office under state freedom of information laws shows that the firms consider the Texas lottery an underperforming state asset being held back in part because state officials are hesitant to aggressively market what is essentially a gambling operation.

Most of the proposals recommend a long-term lease agreement, not an outright sale of the lottery, and an iron-clad provision that the lottery still be governed by a state commission to ensure that the public's interest is protected.

The proposals also include a multibillion-dollar upfront payment to the state by any private operator and a guarantee of an annual payment in the neighborhood of the $1 billion a year that the lottery currently generates in profits. The state could share in any profits above that.

"A private operator will pay a premium for the chance to improve profits above what the state can realistically achieve," says the proposal submitted in April 2007 by Lehman Brothers.

Change in marketing

According to a demographic study released in December by the University of Houston, fewer and fewer Texans are playing the lottery. And those who do play most tend to be lower wage earners with less education.

The study found that people without a high school diploma are likely to spend more than $60 a month on lottery games. People with a four-year college degree are likely to spend about $5 a month. People who earn $20,000 to $50,000 a year spend twice as much on lottery games as people who earn $100,000 a year or more.

The privatization proposals say the lottery needs to end its reliance on a ticket-buying base of low-income earners by marketing the games to people with college educations and more disposable income.

One suggestion is allowing ticket sales at grocery store and department store cash registers, where the price of the ticket would be rolled into the overall outlay. The same strategy could be used in cafes under some of the proposals.

Gerald Busald, a mathematics professor at San Antonio College who has conducted several studies of the Texas lottery operations and its players, questioned whether the pool of lottery ticket buyers can be significantly expanded.

"I don't think those players are out there," Busald said. "If people [with more disposable income] want to gamble, they can drive to one of the casinos across the state line."

Busald said turning over lottery operations to the private sector might deprive Texans of oversight of the game.

Last year, he helped persuade lottery officials to quit marketing scratch-off games after all the winning tickets had been sold. A corporation probably wouldn't allow such input, he said.

'Maximize its benefit'

Some of the proposals include provisions for such expanded gambling venues as video slot machines and an Internet-based lottery as a way to maximize revenue to the state.

Perry and several key lawmakers have said they'd resist such moves. But Perry spokesman Robert Black said that even if no new casino-style games were allowed under a privatization agreement, it would be difficult to squeeze more money out of the lottery without more Texans spending more money on games of chance.

"That's why we have the lottery," Black said. "I don't think there is any appetite in the Legislature to do away with it. So if we are going to have it, it makes sense to run it in the most efficient way possible to maximize its benefit to the state."

Privatization pros and cons

Pro: The state could receive a multibillion-dollar upfront payment to fund such initiatives as education and healthcare.

Con: A private company might be unresponsive to the wishes of Texans.

Pro: Private companies can offer innovative games and marketing strategies.

Con: A company could take undue risks with what was established to be a state asset.

Pro: The contract could be structured to guarantee a minimum annual payment to the state.

Con: Texas might lose if profits were significantly higher than the minimum payment.

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