Place a Bet on Lottery Privatization

State-sanctioned lotteries are being forced to grapple with decreasing interest in their product — gambling — and a corresponding decrease in revenue derived from lottery games. This makes it a good time to consider privatizing Michigan’s 30-year-old lottery, a move that could net the state a one-time payday exceeding $1 billion.

In 1972 the state of Michigan unveiled a new gambling operation of its own creation, one designed, taxpayers were told, to provide public schools with a steady stream of badly needed revenues. Today, the Michigan lottery provides 5.4 percent, or $613,500,000, of the school operating budget on $1.6 billion in gross sales.

According to a recent study by Christiansen Capital Advisors (CCA), a Maine-based consulting company, 186 local, state, and national governments operate lotteries worldwide. As of 2000, global sales of lottery products exceeded $122 billion, generating more than $36 billion for the treasuries of governments around the world. According to CCA, in 2000 the United States alone generated $57 billion in lottery sales, yielding $18.35 billion in public revenues or “profits” to government treasuries in the United States.

But sales from lottery gaming — across states and nations — have stagnated as gamblers have grown bored with this form of wagering, and as lotteries are forced to compete with private casinos, Internet gambling, and sports wagering.

Several governments have responded by privatizing lotteries to some degree. In Greece, the government sold a 5-percent stake in its state lottery and raised $83 million in capital. In Italy, the government contracted with a private firm, Lottomatica, to manage its official lottery. The result: Company officials report that they expect lottery sales to increase by 38 percent between 2001 and 2004 - not bad, even as lottery sales dwindle in other nations.

In the United States, Connecticut has attempted partial privatization of its lottery system. The state converted its lottery system to a nonprofit corporation in 1996 — something Michigan Privatization Report refers to as “nonprofitization” — in an attempt to reduce its operating costs.

According to the Christiansen Capital Advisors study, the Connecticut Lottery Corporation has helped that state save about $1.25 million annually while increasing sales by almost 18 percent since 1996. This is particularly impressive given the expansion of privately run Casinos in the state. A large part of the savings — $500,000 worth — came from the nonprofit’s flexibility in contracting with instant-ticket providers.

From a historical perspective, Connecticut’s lottery nonprofitization should be of interest to Michigan taxpayers. Why? Because Michigan instant ticket lottery tickets used to be the most expensive lottery tickets in the country.

Prior to 1998, a Depression-era Michigan law, the State Printing and Bidders’ Requirement Act, mandated that state printing be done by firms whose workers either belong to a printing trade union or that pay their workers the ‘“prevailing wage.’” What this meant for the Michigan lottery is that companies that print the many colorful tickets for the various games must pay their workers union-scale wages, even if tickets of equal or better quality could be provided by lower, competitive-scale wages. The mandated high labor costs are passed on to the lottery, and indirectly to taxpayers. In 1993 Michigan had the most expensive lottery tickets in the country. The state paid $21.99 per one thousand tickets, 33 percent more than the next-costliest state. The law was changed in 1998 to exempt lottery officials from the 1937 Act, and lottery officials, to their credit, used their newfound flexibility to seek competitive bids for the printing of instant tickets.

How much money might Michigan’s lottery system sell for if state officials chose to privatize? If recent lottery privatizations in Europe offer any guide, Michigan could reap one-time revenue in the range of $1.3 billion to $2 billion.

What would happen to gambling money now generated for schools if the state exits the lottery business? A simple analysis might suggest that schools could see a drop in gambling revenue, as profits from lottery gaming began accruing to the business that bought it. But the state could mitigate these losses by applying the state’s 6-percent sales tax to each ticket and directing all the revenue derived from ticket sales the School Aid Fund.

Assuming conservatively that gross sales of lottery tickets never exceed $1.5 billion, a 6-percent tax still would generate $90 million in revenue. The state may also consider a special franchise fee that would be paid by the private lottery operator and that could be directed to the School Aid Fund. Other options include making up the lost funds from other budget sources. Of course, public schools could offset any potential loss in funds by outsourcing cafeteria, transportation, custodial, and other noninstructional services, as many districts already do.

Would privatizing Michigan’s lottery solve the state’s current budget problem? Not by itself. But it would make a significant dent, and for that reason alone it merits a closer review.

Michael LaFaive is director of fiscal policy for the Mackinac Center for Public Policy and senior managing editor of Michigan Privatization Report.