Talking up sale of Maryland lottery

The Baltimore Sun

With a huge cash crunch on the horizon and soaring demands for school construction, new roads and mass transit, some Maryland lawmakers are talking up the idea of selling one of the state's most valuable assets: the lottery.

The idea has grown popular since the governor of Illinois proposed doing the same thing last year. The governors of Indiana and Texas have suggested similar moves, and discussions of the idea are taking place in Michigan and New Jersey.

Maryland faces a gap of $1.3 billion between expected revenues and spending in the fiscal year beginning July 1, with more cash problems predicted for the years ahead. Meanwhile, lawmakers are reluctant to push for new taxes. This has prompted some leaders to look for more creative ways to balance the books.

"I think it's one idea we should have a discussion on," said Sen. Ulysses Currie, chairman of the Budget and Taxation Committee. "Ten billion dollars upfront would sound pretty good in Maryland right now."

Maryland doesn't have an estimate for how much its lottery might be worth, but Illinois Gov. Rod R. Blagojevich has predicted his state's lottery could sell for $10 billion. Texas Gov. Rick Perry said this week that his state's lottery is worth at least $14 billion.

But the idea of privatization is far from catching on in Maryland. Even as Illinois and Indiana have privatized some of their toll roads, Maryland has been reluctant to part with its assets.

Former Gov. Robert L. Ehrlich Jr., a Republican, floated the idea of selling all sorts of public property, from parkland to the World Trade Center, only to meet strong opposition from the legislature. The idea of selling the lottery - a state asset that is expected to pour nearly $500 million into the state general fund next year - strikes many leaders from both parties as crazy.

'Your seed corn'

"You don't sell your seed corn," said Senate President Thomas V. Mike Miller, a Democrat who represents Calvert and Prince George's counties.

"There are very few cows left on this farm," said Del. Anthony J. O'Donnell, the House Minority Leader from Southern Maryland. "We ought to be very careful about selling them off."

Another factor weighing against the chances for privatization is that the lottery is established in the state constitution, so a move to sell it would likely require the approval of voters.

But some lottery experts say states haven't done a good job of managing their lotteries and aren't reaping their full potential in the way a private firm might.

Michael Johns, who headed Illinois' lottery in the 1980s and is now director of the Chicago-based Institute of Lottery Research, a consulting firm, said most states have seen lottery revenue stagnate over the years. As with horse racing, where wagering has suffered from a generational shift in entertainment preferences, lotteries typically rely on a dwindling pool of consumers, Johns said.

Selling the lottery might not amount to killing the goose that lays golden eggs, he said.

"It's to some extent an aging goose and a somewhat tarnished egg," he said. "Most of the sales increases over the last 10 or 15 years have come from increasing the percentage of prize money that they pay out, not from attracting a new audience. It's not from increased demand but, in essence, paying out more to crunch sales."

2006 analysis

An analysis by the Department of Legislative Services found last year that growth in lottery revenue has not been keeping pace with the state's economy.

Warren Deschenaux, the legislature's chief fiscal analyst, said sales have been off recently, largely because there has not been a large enough Mega-Millions jackpot to boost sales.

Lottery profits are, in general, hard to predict, he said. Last week, for example, the evening Pick 4 number was 4444. So many people won that it cost the state $7 million, he said.

"That's why they call it gambling," Deschenaux said.

Maryland Lottery Director Buddy Roogow said he has not studied the idea of privatizing the lottery in detail, but he said he wonders whether private operators would consider the deals worthwhile, given the constraints that states are likely to put on them in terms of payments and restrictions on how the lottery operates.

But leaders in other states are betting they can come out winners from a privatization deal. Last week, Perry, a Republican, argued that selling the Texas state lottery would eliminate that volatility from state budgets and would result in an annual gain for the state's coffers.

If the state invests the $14 billion generated by a sale and gets a 9 percent return, it would yield $1.3 billion a year, about $300 million more annually than the state gets from the lottery now, the Texas governor said. Perry proposed using the money for cancer research, education funding and a subsidy for those without health insurance.

'Will work for Texas'

"Selling the lottery will work for Texas," he said in a statement.

Indiana Gov. Mitch Daniels was looking for a funding source to pay for a college scholarship program designed to keep top students in the state, said his spokeswoman, Jane Jankowski. He proposed leasing the Hoosier Lottery, a move that he estimated could bring in $1 billion up-front, plus $200 million a year and a piece of the revenue if the private operator took in more than a certain amount.

The Hoosier Lottery brings in about $200 million a year for the state, but Daniels expects that a private company would still make a profit on such a deal because it would be able to operate the lottery more effectively, Jankowski said.

But that kind of thinking hasn't caught on before in Maryland. Christopher B. Summers, head of the Maryland Public Policy Institute, a market-oriented think tank, said his group has pushed for the state to consider public-private partnerships to build schools or private ownership of the planned Inter-County Connector in suburban Washington, to no avail.

"There is a large consensus against any sort of innovative ideas like that," Summers said.

Part of the opposition in the case of the lottery stems from lawmakers' desire to keep control over gambling. Sen. Nathaniel J. McFadden, the president pro tem and a Baltimore Democrat, said Maryland used to have a privatized lottery - it was called the numbers racket.

"I wouldn't want to go in that direction," he said.

Why sale opposed

But mostly, state officials cast their opposition in financial terms. Comptroller Peter Franchot, a Democrat who used to head the House committee with oversight over the lottery, said it would be a mistake to sell an asset with strong income potential for short-term gains.

"The state needs to be very cautious," Franchot said. "There are other states that are more reckless than we are."

Del. Tawanna P. Gaines, a Prince George's Democrat who chairs Franchot's old committee, said she has no intention of bringing the idea up.

"We like what the lottery is doing," she said. "It would have to be a truly compelling reason for me to even consider presenting it."

andy.green@baltsun.com

POINTS OF VIEW -- LOTTERY PRIVATIZATION

Some lawmakers in Maryland are considering the idea of selling Maryland's lottery to a private operator, a move being discussed in several other states.

Pros

The state could get a quick infusion of cash - possibly billions of dollars - to help eliminate expected deficits in the next few years

Lottery revenues, while growing, have not kept pace with the state's economy, making them a diminishing portion of the state budget

Cons

Maryland could be giving up a source of long-term revenue for a short-term gain

No other states have taken this step, so the true benefits and risks are unknown

A lottery expert from Chicago was misidentified yesterday in a front-page article about the potential privatization of the Maryland lottery. He is Michael Jones, director of Independent Lottery Research.
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