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Illinois Lottery may privatize lottery to solve budget woes

Apr 5, 2010, 7:03 am

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Illinois Lottery

The search for revenue to help fix to the state's budget woes has put a spotlight on the Illinois State Lottery.

For more than three decades, the lottery has been a steady, reliable source of revenue for the state. Since 1985, it has brought in more than a half billion dollars annually.

But, just as other state and local governments have sold off assets to help balance their bottom line and avoid tax hikes, the lottery is now being marketed as a potential target for a hybrid brand of privatization.

Unlike ideas to privatize toll roads or airports, the state wouldn't give up total control of the operation. Rather, a company would manage the lottery, with the state still keeping a hand in its overall operation.

The estimated payoff: $1 billion over 10 years.

In a meeting last year with investment bankers and lobbyists interested in working with the state to craft such a deal, an Illinois Department of Revenue lawyer told the group what is at stake.

A big deal

"It is going to be probably one of the largest procurements the state has ever done," said general counsel Melissa Riahei.

As officials with Gov. Pat Quinn's administration envision it, the deal would allow a private manager to be paid a percent of Lottery profits. The company could increase its earnings if it grows revenues by boosting marketing, adding new games like keno or Internet lottery sales and finding so-called "efficiencies" in operating costs.

This all comes as the lottery already appears to be doing pretty well under its current management structure. Acting lottery director Jodi Winnett said profits are up, money is being generated for the state and players continue to buy tickets at an average rate of about $55 million per day.

But, she said, the private manager concept is what the General Assembly wanted when it approved legislation last year.

"This is the opportunity they saw and this is an opportunity we're exploring," Winnett said.

Doubts

Some have their doubts.

The Lottery is already increasing its sales almost every year, so it's unclear what a private manager would do to generate even more profits, said Margaret DeFrancisco, head of the Georgia lottery and the North American Association of State and Provincial Lotteries.

"I'm not sure what that company would bring to the table," DeFrancisco said.

One tactic under consideration is the sale of lottery tickets on the Internet — a practice now banned by the federal government.

Winnett said the state is working with the U.S. Department of Justice to try and craft a solution.

While it waits for the federal government's answer, the state is moving cautiously as it attempts to put the management idea out for bids.

Revenue officials have spent months working to hire an outside company to help write a request for bids. They say outside expertise is needed because of the potential size of the deal.

But, in hiring someone to help write the bidding documents, the state also is trying to be careful not to give the job to a firm that might want to later bid on the management contract.

Openness needed

In a series of meetings with potential vendors, the agency discussed the need for transparency and openness so that the sale of the management rights for the lottery wouldn't be tainted by insider dealing.

"Our lottery has a good reputation. We want to make sure it stays that way," Revenue spokeswoman Sue Hofer said. "We want to get it right."

Last week, after months of meetings, the state hired New York-based management consulting firm Oliver Wyman Group for $3.95 million to help write the mega-deal. The company begins work April 15.

Originally, the idea was to have a management agreement in place this spring.

But, delays in trying to craft a workable bidding document have pushed that target into the next calendar year.

That means any money from the deal will not help give Illinois any immediate relief from its monstrous budget woes.

"The new manager is going to need some gear-up time. So, we're not counting on much," said Quinn budget chief David Vaught. "We've been very cautious about that."

In fact, few are willing to guess at exactly how much money will roll in if the plan goes through. And, analysts aren't sure if the legalization of video gambling will cut into the amount people spend on lottery tickets.

Avoiding corruption

The post-Blagojevich, post-Ryan landscape of Illinois government has state officials stepping carefully when it comes to hiring a private company to run the Illinois Lottery.

Hoping to avoid the corruption that brought down Illinois' two previous governors, the Quinn administration has attempted to make sure companies involved in the potentially lucrative transaction won't benefit from insider deals.

For example, the company selected to write the bidding documents for the $1 billion deal would be barred from any business relationship with whoever is chosen as the manager for a year after the management contract is awarded.

Companies wanting to serve as the state's lottery consultant also were required to disclose all of their business relationships.

The procedures raised questions among some of those interested in helping craft the package.

In December, lottery officials sat down in a meeting room on the 7th floor of the Thompson Center in Chicago with a number of companies interested in being a consultant on the proposal. The group included a number of top international banking and investing firms, including Credit Suisse, Citigroup, Merrill Lynch, J.P. Morgan and Barclays Capital.

In that meeting, a representative of Citigroup said the preventative measures being taken by the lottery may be too restrictive on some companies. In particular, disclosure agreements and bans on dealing with companies for a year after the bid is awarded could stop any of the large banking and investment firms from participating.

Acting lottery Superintendent Jodie Winnett said the state won't waver from its stance.

"I can't overestimate the importance of the integrity of the process," Winnett told the assembled group. "It's a very high profile and somewhat volatile role for the government, and it needs to be handled appropriately."

In the end, only three companies submitted bids to serve as a consultant for the state, with New York-based consultant Oliver Wyman winning the competition. The company will be paid $3.95 million for its work. 

Lottery a steady cash cow

On an average day, people throughout the state buy about $55 million in Illinois Lottery tickets.

A scant few of the millions of people who play actually win a life-changing amount of money, but every year the state earns hundreds of millions of dollars from the ticket sales — more than $600 million a year recently.

The Illinois Lottery today is a lot different than its first year in operation. In 1975, the state sold $129 million in tickets for the year — less than three days' work now.

Illinois Lottery Acting Superintendent Jodie Winnett said last week that so far this year, the lottery stands to sell more than 6 percent more tickets than it did last fiscal year.

Using the state's annual report on gambling, here's a look at some key points about how the Illinois Lottery works.

  • Last fiscal year, Illinois sold a record $2.08 billion in tickets. The state profit was $625 million.
  • Last year, the lottery's profit margin was the lowest ever at 30 percent, meaning 30 cents of every $1 people spent on tickets went to pay state bills. The highest-ever profit margin was about 46 percent in 1976, the lottery's second year. Last year, about 59 percent of all the money spent on tickets went to winners.
  • Scratch-off tickets are by far the biggest seller, making up 54 percent of total sales. The Pick 3 game is a distant second at about 14 percent of all sales.
  • Since it began in 1975, the Illinois Lottery has sold $41 billion in tickets and taken in $15.4 billion for the state.
  • Lottery Post keeps all past winning numbers and a search feature for each Illinois game at its Illinois Lottery Results page, www.lotterypost.com/results/il
  • People with gambling addictions can sign an agreement with the lottery to exclude them from winning. Someone who opts out forfeits collecting any win more than $600, in theory dulling their interest in playing.

Thanks to Coin Toss for the tip.

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