Winning Combination? 

Whether you consider them a tax on the poor or a harmless way to spend a dollar or two, lotteries have entrenched themselves in almost every state government's operations. In California, Gov. Arnold Schwarzenegger hopes that transforming the state lottery into a public-private partnership will cure what ails the Golden State, while others contend government should not be involved with the lottery at all.

Forty-two states permit, operate or participate in one or more lotteries. Most games were established to generate revenue, usually to help perpetually feeble state programs, such as education, or to add needed cash to a state's general fund.

The odds of winning are long -- about 1 in 14 million for the traditional 6 of 49 games, and approximately 1 in 150 million for interstate games such as Mega Millions and Powerball -- but by and large, most state lotteries attract enough players to bring in money. In California, however, the lottery is a long-time underperformer. Despite a 2005 move to participate in a second lottery, the interstate game Mega Millions, the California lottery continues to generate far less revenue per capita than most states.

 
The Big Idea
Earlier this year, as part of his strategy to help mend California's budget, Schwarzenegger began floating the idea of outsourcing lottery management to a private consortium in exchange for a one-time lump sum somewhere between $12 billion and $37 billion.

"The governor is considering leasing the state lottery in order to maximize its returns and improve performance for California's taxpayers," said Schwarzenegger spokeswoman Sabrina Lockhart. "By allowing a private firm to run the lottery more efficiently and profitably, California will receive more money without giving up ownership.

"Any lease deal will protect the lottery funding our schools get now, and guarantee they'll continue to receive funding at current levels," Lockhart continued. "If the lottery performs better under leased management, education stands to get more money. This money isn't future revenues we'll bank today. These are brand-new funds from higher profits."

In a radio address earlier this year, the governor detailed why he was considering letting a private entity manage lottery operations and what he expected from such a deal.

"A leading investment firm says our lottery is worth tens of billions of dollars. Despite that tremendous market value, our lottery is only generating a little more than $1 billion a year for our schools," Schwarzenegger said. "By leasing the lottery to a private company, we would maintain ownership but turn ticket sales and marketing over to someone who could do it better. And the company that leases the lottery would pay hundreds of millions of dollars a year in corporate taxes."

 
Lucky Numbers
The governor's plan for the lottery seems like a great idea on paper.

The state would hand over lottery operations to a private organization. This as-yet-unnamed group would operate the lottery for 40 years after paying the state the estimated billions the lottery is reputedly worth.

After the transaction is made, the state would use the money paid by the private entity to set up an endowment fund -- an investment fund in which the principal is left intact while any additional monies are used to support programs -- for education, ensuring schools would receive the constant funding stream the lottery originally was set up to produce. Any money remaining after the endowment fund is created could be used to cover other expenses. If the lottery commands a selling price on the higher end of its estimated value, the governor claims schools would reap more than $1 billion annually.

And what value would there be for a private entity to manage lottery operations? Analysts claim a private firm could more effectively market the lottery and generate higher revenues

Chad Vander Veen  |  Editor, FutureStructure

Chad Vander Veen is the editor of FutureStructure.com