All that stands in the way of Gov. Eliot Spitzer’s (D) plan to lease the lottery to a private investment bank is the Legislature, and perhaps the State Constitution.
In his State of the State address, Spitzer proposed building a $4 billion endowment for the State University (SUNY) and City University (CUNY) systems by making New York the first state to change the management of its lottery system by turning to the private sector. Some legislators were taking issue with the idea even before the Assembly chamber emptied after the speech, but Spitzer and his staff have been pursuing the idea nonetheless.
Those in the Spitzer administration have downplayed the significance of a lease. However, many expect that a lease would be a major change for the state lottery: currently, private businesses sell tickets and manage aspects of the system, but a lease could give a private company the ability to market the lottery, and guide how games are sold and where they are sold in exchange for a share of the revenues. Some estimates put the amount of upfront cash that this could generate at $40 billion for the state.
Sean Patrick Maloney, Spitzer’s first deputy secretary, is coordinating the lottery leasing planning. Reports characterizing Spitzer’s proposal as a privatization scheme are flawed, Maloney said.
“We are not selling the lottery, and it will remain a state asset,” he said. “So it is just wrong to say that we are privatizing it.”
Instead, Maloney said that the governor’s plan to “monetize” the lottery will allow a private investment bank to manage the lottery in exchange for the right to lease a portion of revenues. The administration has set a March 17 deadline for hiring an independent financial advisor before releasing a final proposal.
Maloney believes that by merely leasing the lottery, the state can retain the authority demanded over the lottery by the State Constitution.
The lease structure could also help the state get around a second potentially problematic constitutional provision which requires that all net proceeds from the lottery go directly to education funding.
“Someone could own a lease and take some of the revenues,” Maloney said. “Remember, large portions of the lottery operations are now conducted by private parties … who are compensated for the role they play.”
Compensating private operators was found legal in the 2005 Dalton v. Pataki decision. However, that same decision prohibited “a ‘fee’ so excessive as to constitute a flagrant end-run around the requirement that net proceeds of the lottery be applied exclusively to education.”
Last year, 12 percent of the lottery’s $6.6 billion in gross revenue went to contractors and other operating expenses. Maloney said that it was premature to estimate the percentage of lottery revenue private investors involved in a leasing deal would receive under the Spitzer proposal.
Gary Pretlow (D-Weschester), chair of the Assembly Committee on Racing and Wagering, called any proposal to lease the lottery a bad idea.
“I think it’s fuzzy math,” he said of the idea that a lottery lease would be the most profitable option for the state.
“I don’t want to use the word ‘short-sighted,’” he said, referring to Spitzer. “What he wants to do is good, but the methods do not equate to the results.”
But Pretlow was open to the idea that more money could be wrung out of the lottery without leasing its operations.
“Anything that a private investor can do, the state can do without that commission going to a private investor,” he said.
Pretlow did not just disagree with the idea. He said that he believes giving private investors control of and compensation from revenues running is unconstitutional.
Spitzer’s plan faces opposition on similar grounds in the Senate, led in part by William Larkin (R-Orange/Ulster), chair of the Senate Committee on Racing, Gaming and Wagering.
Proposals that would have put lottery revenue in private sector hands have so far failed in six other states. Larkin said he hoped Spitzer will agree with him that a deeper guiding issue explained the rejections of those plans.
“I understand why he’s talking about it, the future opportunity for education,” Larkin said. “But we can’t sell our souls.”
James Featherstonhaugh, senior partner at the lobbying firm of Featherstonhaugh, Wiley and Clyne, said that he knows of several private investors who are interested in leasing a piece of New York’s lottery. His clients include Goldman Sachs, as well as G-Tech, the company which is currently under contract with New York to help manage the lottery.
Featherstonhaugh could not say if Goldman Sachs was interested in having a lease agreement with New York, but he noted that in Illinois—one of the states where a similar lottery measure failed last year—there were multiple firms ready to bid on a contract with the state.
He said that revenue stream for the private sector could be enormous.
“It would be in the $50 to $70 billion range if you privatized the whole thing,” he estimated.
This would be annual revenue for the leaser, potentially after a one-time upfront lease of $40 billion and other fees.
Featherstonhaugh said that one of the things that makes New York’s lottery so attractive is the ample room for growth, noting that New Yorkers spend an average of $374 annually on lottery tickets, while Massachusetts residents spend nearly $700 on average annually.
Featherstonhaugh said that some private firms have plans that could bring New York more in line with the Bay State.
One idea he has heard would be to ease the process of approving new Quick Draw outlets in New York City. Another would be to reduce the amount of time for new numbers to come onto the Quick Draw system. Currently, there is an hour-long pause in New York. In Massachusetts, the pause for a similar game is three minutes.
And there are more radical ideas for the lottery floating within the private sector as well, Featherstonhaugh said.
“One group,” he said, “said that we could have lottery outlets in Starbucks.”