PA Lottery Management Proposal - Good or Sweetheart Deal?

Many Patch Websites have carried a story about Pennsylvania Governor Tom Corbett’s desire to transfer management of the PA State Lottery to a private management company. TribLive.com, the Pittsburgh Tribune-Review’s Website edition, posted a story on the matter on Friday, November 9.  That story leads me to believe that the good citizens of PA ought to take notice, stay informed, and be prepared to express their opinions to their legislators.

Corbett’s plan would turn over management of the lottery to a private company for an initial period of 20 years. The rationale for that move is the hypothesis that the private company would increase lottery sales and reduce the operating costs making the Lottery more profitable for the State. Corbett has indicated that a deal would not be made if it meant a loss in revenues for PA.  

State Democratic leaders are concerned about the plan because they have not seen proposals or proof of benefit. I think they have good (not conclusive) cause for concern.  A look at the numbers explains my thinking.

The PA Lottery in the 2011-2112 fiscal year has gross sales of $3.48 billion. After all operating expenses and prized awarded the net revenue was $1.06 billion. That is just a bit over a 30% profit. I don’t know of any business that would balk, if it could come close to 30% net profit.  

Under the Corbett’s plan the deal with the private management company would be initially for 20 years with possible 10 year renewals. The private company would post collateral of $150 million in cash upfront and guarantee the State a certain yearly amount of return. If that guaranteed figure was not met, then the difference would be paid to the State from the collateral cash. That $150 million is a tad over 14% of the 1.06 billion profit in FY 2011/2012. Assuming the Lottery could earn at least $1 billion in net revenues for the 20 year term of the deal, an amount less than its most recent year’s net, the aggregate net revenues would be $20 billion.  

Is $150 million collateral enough?  If you wanted a 20 year residential mortgage today you would have to put down at least 20% of the sale price. That is effectively collateral. On a 20 billion dollar house (not that there is one) the required collateral would be $4 billion dollars. That makes $150 million collateral on a $20 billion deal look like an exceptionally good deal for the private management company. 

A spokesperson for the PA Dept. of Revenue indicated “said the plan would provide a predictable revenue stream even in years when the lottery does not meet revenue projections.” However, if you read the February 2012 Report of the PA Legislative Budget and Finance Committee (found at http://lbfc.legis.state.pa.us/reports/2012/62.PDF) you will see that the Lottery is projected to grow its revenues, albeit slowly, through the 2016-2017 FY. That report also lists the future prospects for the Lottery and makes recommendations to improve performance. The report does not suggest that PA Lottery management given over to a private company.  

I am a bit miffed at why Corbett sees the need to hand over management of the Lottery to a private company when it seems to be quite profitable as currently operated prospectively future operated by the State. I am more miffed at the comparatively small amount of collateral needed to get management control over a cash cow for PA and its senior citizens. I think the State ought to publish some numbers showing what a Lottery management change would likely mean in guaranteed (not promised) revenues to the State. In the meantime, I am going to write to my State Senator, Daylin Leach, to let him know how I fell. Are you?