Daniels still wants more from lottery, through privatizing or bond issue

September 8, 2008

Republican Gov. Mitch Daniels' first attempt to raise $1 billion or more by privatizing the Hoosier Lottery failed in 2007 when Democrats in the Indiana House of Representatives balked.

Now, Daniels is building his campaign for re-election in part on another attempt to cash in a huge lottery jackpot.

This time, he's hedging his bet. In case leasing the Hoosier Lottery outright to a private operator is politically impossible, Daniels is exploring a major bond issue backed by its future revenue.

But experts on gambling and finance say the plan remains fraught with uncertainty. For either scenario to be successful, they say, the state would need to substantially increase lottery profits, which have been running between $210 million and $220 million a year.

That's politically sensitive territory, since profits grow in direct correlation with players' losses.

And because Indiana would be entering uncharted waters, the size of the state's windfall is unclear. Many states have begun talking about privatizing their lotteries or issuing bonds backed by future lottery revenue--a process known as securitization--but none has yet done so.

This month, Daniels launched an ad campaign suggesting the payoff would be too good to pass up. He said proceeds would go toward helping high school graduates pay for higher education.

"Back when the Hoosier Lottery started, they told us it would be used for education. It didn't happen, and it's time it did," he says in the television spot.

"Let's dedicate the future growth in lottery proceeds to guaranteeing every Indiana high school grad two years at Ivy Tech, or that same amount at the school of their choice."

Business community heavyweights, such as the Indiana Chamber of Commerce and the Central Indiana Corporate Partnership, already have jumped aboard to support the plan.

But they invariably focus on the upside--the potential of having $1 billion or more available to help prepare students for the work force of tomorrow--rather than on how, or if, the money can be raised.

Companies specializing in running lotteries, or helping states do so, are unlikely to seek Indiana's business unless the state's goal is to ratchet up profits, said David Schwartz, director of the Center for Gambling Research at the University of Nevada Las Vegas.

There's not much expense for lotteries to cut, he said. So leases or bonds make sense only if they're tied to a large increase in ticket sales.

"I'm not a mathematician," he said. "But the math doesn't make a lot of sense to me."

If the state opted for a bond issue, rather than outright privatization, there may be even more uncertainty.

Gambling experts say the fact that other states also are exploring securitizing lottery revenue increases competition, potentially reducing Indiana's payoff. National turmoil in the banking industry also could be a factor.

And the market for lottery securitization is untested. In a March 2007 report, Standard and Poor's noted that such bond issues would be unlikely to garner the lowest interest rates, in part because of "the likelihood of the vendor invading the revenue flow" before payments were made on the bonds.

Ends before the means

Daniels launched his second attempt to milk the Hoosier Lottery cash cow Aug. 13, when he announced the Hoosier College Promise program. It would give Indiana full-time students from families who earn $60,000 or less two years of free tuition at Ivy Tech Community College, or $6,000 to apply toward tuition at another college.

To keep the scholarships, students would have to maintain at least a C average. Daniels estimates his plan would cost $50 million annually.

Business leaders heartily endorse the idea. Indiana Chamber President Kevin Brinegar pointed out that heavily regulated private companies already pay large license fees to operate all of Indiana's casinos and horse tracks. He questions why the lottery should be any different.

And he argued the chance to inject major new resources toward Indiana's higher education is too big to reject.

"This is just too important an opportunity," Brinegar said. "All indications are it will be a tight budget year [in the Legislature next year]. It won't be 1999 with hundreds of millions in surplus. If you're going to do something significant in that area, you've got to identify a new and innovative source. And this is the only one brought forth."

In a blog posting on the CICP Web site, Conexus Indiana CEO Carol D'Amico dismissed fears that Daniels' plan would result in a massive expansion of gambling.

"Under the legislation considered last session, at least, the private manager was specifically prohibited from expanding the menu of lottery games," she wrote.

Further, she noted that, compared with residents of other states, Hoosiers spend relatively modest amounts on lottery games. Per-capita spending is $118, ranking Indiana 26th among the 41 states with lotteries.

New managers would be encouraged to "market the lottery aggressively, but it's unlikely to turn Hoosiers into a pack of gambling addicts," she wrote.

Profit path

But the opportunity to dramatically bolster the Hoosier Lottery's sales is exactly what excites potential vendors.

Michael Jones, director of the Chicago-based consultancy Independent Lottery Research, was part of one of the groups that submitted non-binding bids to run the Hoosier Lottery last year.

Jones managed Illinois' lottery in the 1980s, and he's full of ideas on how to boost revenue.

He said Indiana's lottery, like lotteries in most states, depends on a small number of repeat players for the vast majority of ticket sales. The key to growth, he said, is expanding that core group, which consists of 10 percent to 12 percent of the population.

To broaden their appeal, Jones said, lotteries need to ramp up their marketing and innovate regularly. Rather than simply offer cash, for example, they could offer prizes in step with consumer trends.

Jones pointed to Florida's lottery, which quickly sold out all its tickets when it recently introduced a game with a free-gas-for-life payday. Games offering iPods or flat-screen televisions could have similar appeal, he said, for both players and advertisers.

Total privatization isn't the only path to increased lottery profits, Jones said. They can grow either under the outright supervision of private business or with the help of outside consultants.

But management of public perception is critical. He said players are willing to accept their inevitable losses only because they believe the money underwrites worthwhile state spending.

If players start to think their losses are simply lining the pockets of executives and Wall Street tycoons, their interest flags.

"Lottery profits are player losses, and people want to see the losses benefit things they believe in," Jones said.

"The great politics of [Daniels'] idea, the genius of it [is], if you use lottery proceeds to finance scholarships, you're directly impacting a lot of people in the state of Indiana, and that's what a lottery's promise is," he said. "Your losses will affect the common good."

Deal opposition

The governor is clearly betting that a pledge to provide tuition help to needy high school seniors will boost his chances for re-election.

But his gamble has risks. Daniels' Democratic opponent, Jill Long Thompson, already is arguing that Indiana should roll back his aggressive privatization efforts in other areas, such as the $3.8 billion lease of the Indiana Toll Road negotiated two years ago.

She's likely to paint any attempt to privatize the Hoosier Lottery with the same brush.

Daniels also risks the ire of gambling opponents.

"He has promised us from the very beginning of his tenure, no expansion of gambling. We consider this a big lie," said Rev. John Wolf, co-founder of the Indiana Coalition Against Legalized Gambling.

"If we've got to pitch lottery tickets to another level of people who are economically in trouble, the middle class, we are not helping the middle class. We are giving them another mirage to defeat what the state is all about."

Daniels' biggest obstacle could be the Indiana General Assembly, which would have to approve either privatization or the securitization of lottery revenue.

House Speaker Pat Bauer, D-South Bend, said he remains completely opposed to full privatization.

But Bauer is willing to consider the bond issue.

"That's more pragmatic and practical, and wouldn't obligate or indebt us too much, and would probably easily cover the $50 million," Bauer said.

"The end doesn't always justify the means," he said. "But if the means is not massive expansion of advertising and massive expansion of losers in gambling, perhaps we can get there in moderation."

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