Critics claim private lotto hurts public

Monday, May 14, 2007 posted 10:22 AM EDT

SACRAMENTO — The California lottery would finish fulfilling its engineers' original intent — making money for private interests — under Gov. Arnold Schwarzenegger's privatization plan.

The private investors in this case might well be already rich families in Italy, which indirectly hold the contract for operation of California lotto games and are uniquely positioned to take over the whole lottery, say analysts.

"Privatizing the lottery would bring it full circle," said Tim Hodson, director of the Center for California Studies at California State University, Sacramento.

"The original lottery initiative was conceived, written and financed by Scientific Games, which intentionally wrote the (Proposition 37) language in a way that almost guaranteed it would get the (scratch-off ticket supply) contract. And that's exactly what happened in 1984."

Contracts to run lotto and other on-line games came later, when Rhode Island-based GTECH won and kept the contract to run those operations, under state control. Italian-based Lottomatica came into the picture when it bought GTECH.

Fred Jones, an attorney who represents groups opposing gambling expansion, said, "If this proposal is successful, California will have a state-sponsored gambling system that is leased by a private company and operated by a foreigncorporation controlled by two Italian families. It's absolutely unbelievable and totally unacceptable."

The governor wants California to become the first state to privatize its lottery, a proposal peppered with uncertainties and drawing opposition, but also one that has intrigued some lawmakers and stakeholders.

Schwarzenegger said the move could bring in tens of billions of dollars immediately, or through a series of smaller payments over several decades.

The state would lease the lottery to a private firm for a set time, probably dozens of years, in return for a yet unknown but large sum of money that could be used for whatever he and lawmakers decide.

Some analysts said lottery privatization didn't matter much in the overall operation of state government, as long as the deal was carefully crafted.

But Melissa Michelson, a political science professor at California State University, East Bay, called the idea "another quick fix" from a governor opposed to raising taxes.

"California needs to solve the underlying problems behind the budget crisis," Michelson said. "This just delays the tough choices until beyond the Schwarzenegger administration."

Sonoma State University professor David McCuan agreed, saying Schwarzenegger "has gone into his bag of tricks again and pulled out another bit of smoke and mirrors."

Experts said a private firm interested in leasing the lottery would be hoping to improve its lackluster performance, compared with other states' lotteries, and thereby its profit margin.

The Lottery Act of 1984 requires half of sales revenue be returned to players in the form of prizes and that at least 34 percent goes to schools, leaving the remainder to the operator.

Last fiscal year the lottery logged $3.6 billion in sales, with $1.9 billion going to prizes and $1.3 billion sent to schools. The state used $413 million to run the games — a figure attractive to private companies that think they could operate more efficiently than the state.

Meanwhile, educators and some lawmakers are concerned what would happen to the lottery's flow of money to schools.

"What's missing in the discussion is how this will benefit education, which was the stated purpose of the lottery," said Sen. Dean Florez, a Fresno area Democrat whose committee oversees the games.

Many educators are still angry the lottery was originally promoted under the guise of being a major source of funds. Though the funding source represents a small portion of the overall $60 billion annual education budget, school officials said it's still important.

Administration officials said schools would get no less than the $1 billion-plus annually they now get from the lottery.

California Parents and Teachers Association President Brenda Davis said she "would review and consider any proposal carefully."

There are many other wildcards in Schwarzenegger's plan to privatize the lottery:

-Would the Legislature provide the necessary two-thirds vote?

-Would the plan need to go to a statewide vote because of constitutional roadblocks over firing state workers and releasing state control, as lawmakers' attorneys say?

-How long will it take some interest in the lawsuit-happy gambling sector to sue, snarling and delaying the entire proposal?

Senate leader Don Perata,

D-Oakland, and Assembly Speaker Fabian Nunez, D-Los Angeles, said they are open to consideration of the governor's idea in the Democrat-dominated Legislature. "It's worth at least taking a look," Nunez said.

Republican leaders are generally supportive of the plan but like their Democratic counterparts want to know what the money would be used for in deficit-plagued California.

Approval of the proposal would require a two-thirds vote by the Legislature, which the Republican governor acknowledges he would need under the lottery-authorizing Proposition 37 of 1984.

Administration officials said some of the money could be used to close budget gaps and pay off infrastructure bond debt early while leaving open possibilities for the rest. Continually pressing needs in California include everything from more money for health and welfare programs to additional infrastructure, ranging from prisons to freeways.

A dozen states are toying with privatizing their lotteries, with Indiana among those that have come closest. Some 10 companies are interested in leasing that lottery, but Indiana officials have delayed action on the controversial matter for a year while they study how best to spend the lump sum from the deal.

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