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Privatization of Texas lottery may get 2nd look in 2009

Apr 8, 2008, 10:42 am

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Texas LotteryTexas Lottery: Privatization of Texas lottery may get 2nd look in 2009

Texans could buy lottery tickets at the checkout lines in supermarkets and big-box department stores, at coffee shops and cabarets. They could pay with credit cards or personal checks and play online or the old-fashioned way with a ticket that's also a tiny ad for anything from soft drinks to sporting events.

Those are just some of the proposals offered to state officials by some of the nation's largest financial firms that have an interest in remaking the 16-year-old government-run Texas Lottery Commission into a market-driven enterprise operated by companies motivated more by the prospect of profits than the vagaries of politics.

Although the prospect of turning over Texas' $1 billion-a-year lottery to the private sector received the coldest of shoulders when Gov. Rick Perry first suggested it, a year ago, proponents have been busy laying the groundwork for a second, more concentrated push when lawmakers return to Austin in January for the 2009 legislative session.

"I seriously doubt at this point that they have one vote, much less the 100 they'll need [in the 150-member House], but they're already here visiting with folks to lay out their case," said state Rep. Warren Chisum, a Pampa Republican who heads the powerful House Appropriations Committee.

Chisum, whose committee is among at least three legislative panels to be tasked with at least looking at the feasibility of a closer partnership between the lottery and private enterprise, describes himself as very much a skeptic. He questioned whether lottery ticket sales could generate the billions of dollars that the investment firms say are out there and whether the capital markets want to take chances on state lotteries.

"It sounds very pie-in-the-sky — to me, anyway," Chisum said.

A lease, not a sale

States including Indiana, Massachusetts, New Jersey and California are considering a range of proposals for at least some privatization of their lotteries.

Representatives of the financial firms that have contacted Texas officials were reluctant to speak publicly about the proposals because they are considered rough drafts and much of the information is proprietary.

But material made available by Perry's office under state freedom of information laws shows that the firms consider the Texas lottery an underperforming state asset being held back in part because state officials are hesitant to aggressively market what is essentially a gambling operation.

Most of the proposals recommend a long-term lease agreement, not an outright sale of the lottery, and an iron-clad provision that the lottery still be governed by a state commission to ensure that the public's interest is protected.

The proposals also include a multibillion-dollar upfront payment to the state by any private operator and a guarantee of an annual payment in the neighborhood of the $1 billion a year that the lottery currently generates in profits. The state could share in any profits above that.

"A private operator will pay a premium for the chance to improve profits above what the state can realistically achieve," says the proposal submitted in April 2007 by Lehman Brothers.

Change in marketing

According to a demographic study released in December by the University of Houston, fewer and fewer Texans are playing the lottery. And those who do play most tend to be lower wage earners with less education.

The study found that people without a high school diploma are likely to spend more than $60 a month on lottery games. People with a four-year college degree are likely to spend about $5 a month. People who earn $20,000 to $50,000 a year spend twice as much on lottery games as people who earn $100,000 a year or more.

The privatization proposals say the lottery needs to end its reliance on a ticket-buying base of low-income earners by marketing the games to people with college educations and more disposable income.

One suggestion is allowing ticket sales at grocery store and department store cash registers, where the price of the ticket would be rolled into the overall outlay. The same strategy could be used in cafes under some of the proposals.

Gerald Busald, a mathematics professor at San Antonio College who has conducted several studies of the Texas lottery operations and its players, questioned whether the pool of lottery ticket buyers can be significantly expanded.

"I don't think those players are out there," Busald said. "If people [with more disposable income] want to gamble, they can drive to one of the casinos across the state line."

Busald said turning over lottery operations to the private sector might deprive Texans of oversight of the game.

Last year, he helped persuade lottery officials to quit marketing scratch-off games after all the winning tickets had been sold. A corporation probably wouldn't allow such input, he said.

'Maximize its benefit'

Some of the proposals include provisions for such expanded gambling venues as video slot machines and an Internet-based lottery as a way to maximize revenue to the state.

Perry and several key lawmakers have said they'd resist such moves. But Perry spokesman Robert Black said that even if no new casino-style games were allowed under a privatization agreement, it would be difficult to squeeze more money out of the lottery without more Texans spending more money on games of chance.

"That's why we have the lottery," Black said. "I don't think there is any appetite in the Legislature to do away with it. So if we are going to have it, it makes sense to run it in the most efficient way possible to maximize its benefit to the state."

Privatization pros and cons

Pro: The state could receive a multibillion-dollar upfront payment to fund such initiatives as education and healthcare.

Con: A private company might be unresponsive to the wishes of Texans.

Pro: Private companies can offer innovative games and marketing strategies.

Con: A company could take undue risks with what was established to be a state asset.

Pro: The contract could be structured to guarantee a minimum annual payment to the state.

Con: Texas might lose if profits were significantly higher than the minimum payment.


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5 comments. Last comment 12 years ago by LANTERN.
Page 1 of 1
LANTERN's avatar - kilroy 28_173_reasonably_small.jpg
United States
Member #4570
May 4, 2004
5180 Posts
Posted: April 8, 2008, 2:08 pm - IP Logged

If they want more sales, they should pay more money out in wins, more wins and higher wins.

    Northern California
    United States
    Member #19947
    August 9, 2005
    153 Posts
    Posted: April 8, 2008, 8:24 pm - IP Logged

    The article is interesting, but like almost every other article I've seen on this topic, short on details and loaded up with not-necessarily-true assumptions.


    Lantern - did you know that the Legislature dropped payouts in TX some years back? They made the unfounded assumption that the Lottery is a zero-sum game and if you lower payouts, those dollars will simply flow though to profits. They lost several hundred million in profits before they PARTIALLY restored payouts in TX - but they still penalize the lottery for their own policy failures. If payouts are more than a certain %, the lottery must forfeit $1 million from their ad budget. Sheer ignorance (or worse).


    Texas may be unique...but I've done in-depth demographic analysis on this and "poor people are the ones who play the most" simply isn't true. That said, I've been in retail locations in Houston that had little stock on the shelves but were selling $10,000 a week in Scrtatch tickets. Do we want the lottery to be a nanny and tell folks they can or can't play? That's a rhetorical question...my answer would be "just don't have the lottery positioning itself as a way out of poverty" - that kind of social responsibility.


    TLC is already one of, if not the most efficient lotteries in the US in terms of profit $ per state employee, profit $ per sales rep, etc. That's because it is already heavily privatized. I seriously doubt that a licensee could gain enough freedom of operation to pay the billions up front, the ongoing $1 billion per year, a share of increased profits, the $100+ million out of pocket it would cost to replace the system & network, etc. and still make $$$. The whole prospect is very risky - what are the guarantees that some yahoo (DN?) won't  try to force the operator to do something that will kill their ability to make a return? This is the state where this has already happened (see story to Lantern above) .


    Video lottery, if done right, could be HUGE for Texas. And could be done under the existing structure. Games need revising - yes, including increased payouts. They need to do fewer games per year with bigger print runs (the system can only operate under a hyper level of activity for so many years). Bring back ScratchMan!  Online needs help. But in many ways, the TLC/GTECH team is among the best in the business. 

      TexasDreams's avatar - Trek ROMSYM2.gif
      Houston, Texas
      United States
      Member #56455
      November 19, 2007
      55 Posts
      Posted: April 9, 2008, 9:40 pm - IP Logged

      I play the Texas Lottery every Wed and Sat., its a system with flaws. The TLC payouts are gerrymandered, you may get the advertised jackpot or some other amount based on TLC calculations. The formula can be downloaded from their website for each jackpot, if you trust the numbers. Rick Perry is trying to do anything to make his name a candidate for the GOP Veep nom, so I would not count on the privatization really happening, its just Texas Politics at it's best.

      A few years ago, billionaire Warren Buffett advised  "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

        LANTERN's avatar - kilroy 28_173_reasonably_small.jpg
        United States
        Member #4570
        May 4, 2004
        5180 Posts
        Posted: April 11, 2008, 2:49 pm - IP Logged

        I think that it is crazy!

        They can make more money for sure, but not as much as they think that they can.

        The 2 big problems might be the state government and the lottery itself.

        In order to make more money they would have to be free of all and any restrictions, that is being able to handle the lottery on their own, without the state government and the lottery getting in their way.

        But even is that was possible which would not, they still would not be able to make as much as they think now that they can.

        Increasing both, the lower and upper prize payouts might increase sales some.

        The Tx Lotto should be redone to be like a sort of little lotto, perhaps with a minimum prize of about $200 000 and if nobody wins it, increase it about $200 000 per draw.

        6 numbers of from 1 to 42, no mega nor bonus ball, just a plain old pick 6 game.

        Lower and in between prizes should pay a lot more than such games pay right now.

        The Mega Millions should be the only big lotto game.

        The TxCash5 should pay more money if they want to increase sales, should pay more on all prizes, but mostly on the lower and middle ones.

        The Tx2Step seems to be about right.

        The pick 3 and 4 should be combined into a "Super5" game:

        10x10x10x10x10= 5 000 straight combinations.

        Play 1, 2, 3, 4 and or 5 digits.

        Straight payouts: From $50 (For the pick-1) up to $5 000 (For the pick-5).

        It could also be called "Pick-A-5" or "TxPick-A-5"

        It could also have boxed and pairs plays.

        It could be drawn 2 times a day six days a week and replace all the pick 3 and pick 4 games.

        These are just some very quick basic ideas.

          LANTERN's avatar - kilroy 28_173_reasonably_small.jpg
          United States
          Member #4570
          May 4, 2004
          5180 Posts
          Posted: April 12, 2008, 1:29 pm - IP Logged

          I made a mistake on the last post.

          A pick 5 of the 10 x 10 x 10 x 10 x 10 kind would or should pay up to $50 000 and not $5 000 as I posted before.