California Governor pitching seamy lottery plan

Tuesday, May 15, 2007 posted 12:13 PM EDT

AN old admonition, "When something seems too good to be true, it probably is," virtually screams from accounts of Gov. Arnold Schwarzenegger's proposal to "privatize" the California Lottery. Actually, to give "credit" where it's due, it's a Goldman Sachs/Lehman Brothers proposal. The governor is the pitchman.

The details are subject to negotiation, but the deal works something like this: The state turns over the California Lottery and monopoly control over lottery gambling in California to a private consortium - led by Goldman Sachs and Lehman Brothers, could it be? - for the next 40 years. In exchange, the consortium pays the state a lump sum of about $37 billion.

With that money, the government sets up a $22 billion endowment fund that will guarantee the schools what they're getting from the lottery now - about $1.1 billion a year. That leaves an extra $15 billion to paper over the governor's deficit spending and borrowing spree for the next couple of years.

Schwarzenegger's spokesman calls it "a win-win for California on every front. "What's not to like?

But wait a second. This is not privatization.

Privatizing the lottery means contracting out services to competing firms that offer the state the best value. Schwarzenegger is proposing something different: handing an entire governmental agency, along with its monopoly franchise and all of its revenues, to a private interest until today's high school students are grandparents.

The premise of the proposal is correct: The governor's appointees have done an atrocious job of managing the lottery, and its bureaucracy has become grossly inefficient. That's an argument for competitively contracting out management, promotion and advertising to private companies that specialize in these services, with the schools receiving the full benefit of the increased profits that result.

If there is so much additional money to squeeze out of the lottery, shouldn't that extra money be going to the schools and not to a consortium of investment bankers? Which brings us to the seamy side of the proposal: feverish efforts by a small contingent of politically well-connected investment interests to take over the state's lottery monopoly.

I don't like the lottery and never have. But while it exists under the terms of the voter-approved California State Lottery Act, the state has a responsibility to maximize its returns for support of the schools, not for Lehman Brothers.

According to the Legislative Analyst's Office, this year the state will spend $8 billion more than it takes in. At this rate of deficit spending, the state would blow through the entire $15 billion lump-sum payment from this 40-year "lease" in about two years.

When that money has run out, when the monopolized private lottery is generating vast new sums directly into the pockets of this elite investment consortium, what will posterity say? That this was a "win-win" for California - or one of the most foolish and shameful deals in its history?

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