Privatized Lottery: Schools Lose Out

The California lottery was sold to voters as a big boon for public schools. In reality it adds up to less than 2% of their annual budgets (about $1.2 billion/year). That is not to say that it isn't important to consider the effects of privatizing the lottery on our school's finances. Arnold says that a private company will administrate the lottery more efficiently, earning more money for the state. Where are the savings going to come from?

Schools get about 34% of the revenue generated from the lottery, that is what is left after 50% goes to prizes and 16% to administration and marketing. Where is the profit for the company in this scenario? Who loses out? They won't cut the prizes, that is for sure. It is not hard to predict how this will play out.

Companies will be motivated to reduce the percentage of sales that schools receive, in order to reap their profits. They will likely reduce overhead by paying their employees less and they will work hard to ensure that they are non-union. Dan Weintraub takes on the numbers:

The only way it pencils out is if the schools get less than 34 percent of the sales. If private management can increase the total revenue generated, then the schools could get a smaller piece of a bigger pie, and actually get more than they do today. Everyone might be happy. That, in short, is what Schwarzenegger has in mind.

Arnold has promised that schools will get no less than the amount (but not percentage of revenue) that they are receiving now. That will naturally degrade in value over time due to inflation.

Two investment banking firms that independently approached the state about the idea have estimated that it is worth an upfront payment of between $14 billion and $37 billion -- if the lottery's games were chalking up sales on par with the national average.

Under the most optimistic scenario, the schools could be guaranteed $1.3 billion a year for 40 years, and the state would still get $15 billion in cash up front. That money could be used to pay off the deficit bonds the governor proposed and the voters approved in 2004, which would in turn free up about $1.5 billion a year in taxes that are now going to service that debt.

The question is where would that money go towards? Would schools get a cut to make up for the lost revenue from the lottery? That debt will surely be all paid off way before the proposed 40 year lease of the revenue. The extra $1.5 billion a year is only a short term issue.

If the schools were given a 1 percent annual increase in their money from the lottery, the state's remaining share would decline to $12.1 billion. If the annual increase were 2 percent, the remaining amount would shrink to $8.2 billion. And if the lease proposal generated a less-than-robust response from the private sector, there might not be any extra money at all.

That is why this is gambling with the lottery. There is no guarantee that the extra money will be there. There are significant fixed costs in this enterprise, making it likely that the workers were bear the brunt of the company's attempts to turn a profit, then the schools. This is increasingly looking like a raw deal for California.