Gov. Mitch Daniels said today that he is dropping the idea of privatizing the Hoosier Lottery as an option of funding a college scholarship program after the U.S. Department of Justice said such a move would not comply with federal law.

The Oct. 16 opinion, which Daniels' office said was requested by Indiana and New Jersey, says states would not comply with federal law if they enter into long-term private management agreements to operate their lotteries.

The opinion was issued because several states, including California, New Jersey, Illinois, Colorado, Florida, Michigan, Texas, New York and Indiana, have proposed the long-term lease of their state lotteries in order to fund investments ranging from infrastructure to education.

Daniels has said he wants to give high school graduates from families earning less than $60,000 two years of free tuition at Ivy Tech Community College, or up to $6,000 over two years at another Indiana public or private school. He had said leasing the state lottery could be one way to pay for the annual $50 million program.

His Democratic opponent in this year's governor's race, Jill Long Thompson, has opposed the idea of leasing the lottery, saying it likely would lead to more gambling.

Daniels said in a statement that he was surprised by the opinion from the Justice Department's Office of Legal Counsel.

"The best legal advice available to us had suggested that the OLC would not interpret federal lottery statutes as preventing the long-term lease of state lotteries," he said.

He said although the opinion is not binding, it seemed wiser to look at other options his administration has been exploring to fund his Hoosier College Promise Proposal.

"The goal of the plan is to guarantee a college scholarship to every low and middle income Hoosier high school graduate," he said. "A lottery lease would have been one means to that end, but there can be other financing options available and we will shift our attention to them."

Daniels has said that one alternative would be to issue bonds backed by future growth in lottery profits. He also has suggested shifting funds from programs that were not working to the proposed scholarship program.

The ruling said that federal law requires that a state exercise actual control over all significant business decisions made by a lottery enterprise and retain all but a minimal share of the equity interest in the profits and losses of the business. It also said a state had to retain the rights to the trademarks and other unique intellectual property or essential assets of the state's lottery.

"It is permissible under the exemption for a state to contract with private firms to provide goods and services necessary to enable the state to conduct its lottery, including management services," the opinion stated.

Daniels has proposed leasing the lottery in the past but met resistance from lawmakers.

The Republican-ruled state Senate in February 2007 approved a plan allowing Daniels to lease the lottery for 30 years, with the proceeds going to programs encouraging life sciences research and providing college scholarships for students who agree to stay in Indiana after graduation. But the Democrat-controlled House opposed the measure and killed it immediately.

In April, Daniels said that at least two companies were willing to pay the state more than $2 billion upfront and then $200 million a year to operate the Hoosier Lottery and collect profits above $200 million annually. That figure was more than twice the estimate Daniels gave in December when he proposed leasing the lottery to a private company, with the upfront payment being used to fund higher education initiatives.

Jeff Harris, Long Thompson's campaign spokesman, said today he had not read the opinion. But, he said, "This is another time when the federal government has had to step in and stop the governor from privatizing another aspect of state government. It's alarming that we have to rely on the federal government to come in and make these decisions for Indiana."

The Food and Nutrition Service of the U.S. Department of Agriculture in July advised the Indiana Family and Social Services Administration to delay any further rollout of a welfare privatization until it improved its timeliness in processing food stamp applications. The FSSA, which said it already had delayed the rollout in several counties due to widespread flooding, later said it had improved its efficiency.