Contracting Out Lottery Would Bring Risk With Reward

February 5, 2007

Indiana Writers Group column for Feb. 7 and thereafter
730 words

By Andrea Neal
“A lottery is a taxation — upon all the fools in creation,” said the 18th century English playwright Henry Fielding. “And heaven be praised, it is easily raised, credulity’s always in fashion.”

Almost 300 years later, Fielding’s criticism holds true. “Lottery players are guaranteed, overall and over time, to lose,” said Professor Michael Mainelli of Gresham College in London.

Their premise – that the lottery is a tax on fools – adds an element of irony to Gov. Mitch Daniels proposal to contract out the Hoosier Lottery and use the proceeds on higher education for Hoosiers. The plan, detailed in Senate Bill 577, presumes an upfront payment of at least $1 billion to Indiana in exchange for a 30-year lease to run the lottery. That money would go into two funds: one to pay for college scholarships for smart students who stay in Indiana, the other to lure and keep the best faculty at Indiana colleges.

It’s a plan that has drawn both criticism and kudos. Yet much of the criticism comes from people who oppose the lottery on principle because it encourages folks to waste hard-earned money. Repealing the lottery is not an option on any lawmaker’s agenda. So the question is: Accepting that our lottery is here to stay, does privatization make sense for Hoosiers?

Charles E. Schalliol, director of the Indiana Office of Management and Budget, argues that it does because state government will never be as good at running a business as a business. “Our sense is that it (the lottery) has never been very efficient,” he says, noting that Indiana’s ratio of profit and number of employees per dollar of sale lag behind other states. A private operator will bring with it accounting controls, employee training and recruitment strategies and supply chain management techniques that state government cannot rival.

“The state of Indiana is not a Dick’s or a Wal-Mart,” Schalliol said. “The lottery, if you think about it, really is a retail sales operation.”

Since the lottery began operations in October 1989, profits have gone up steadily but with sporadic and sizable dips. Net income totaled $130 million in 1990, $165 million in 2000 and $216 million in 2006.

Senate Bill 577, authored by Sen. Jim Merritt, R-Indianapolis, would guarantee not just a one-time cash infusion but minimum annual payments to the state of $200 million, which would fund capital projects, pensions and auto excise tax relief.

Daniels is not the only governor to jump on this idea. Illinois Gov. Rod Blagojevich, a Democrat, suggested it last May to his legislature, which is poised to beat Indiana to the punch. Michigan is also discussing privatization. In Greece, the government sold a 5 percent stake in its state lottery and raised $83 million in capital. In Italy, the government contracted with a private firm to manage its lottery and sales shot up 38 percent in three years.

Proponents say governments must try to preserve revenue flows because lottery sales have stagnated as gamblers turn to casinos and Internet gambling.

Duke University Professor of Law and Economics Charles Clotfelter, co-author of Selling Hope: State Lotteries in America, said he has two specific concerns about the move to privatize lotteries. “If you take all the money now, why should today’s taxpayer get the benefit? Why not space it out. You are borrowing from the next generation.” That concern is lessened, he concedes, by the fact Gov. Daniels wants to spend the upfront payment on higher education, an investment in future generations.

His second concern is that once a state hands over its lottery to a private firm, it loses control over many elements of the product and essentially hands over state policymaking to for-profit entity. Schalliol says Senate Bill 577 is highly prescriptive and forbids a contractor from launching Keno, video lottery or other games that Hoosier Lottery could offer now.

“If the state wants to believe it can write down every contingency and nuance, more power to it,” Clotfelter said. “But it usually doesn’t happen that way.”

This much is certain. Whichever company wins a contract to operate Hoosier Lottery will want to maximize profits. Some of that, as Schalliol points out, can be achieved through greater business efficiency — running Hoosier Lottery more like Wal-Mart. But much of it will be achieved by selling more lottery tickets than are sold now.

Nobody has to play the lottery, but many will succumb to the temptation. Long-term, if Indiana students can benefit from a fool’s tax, we just may have found a way to turn lemons into lemonade.

Andrea Neal is a teacher at St. Richard’s School in Indianapolis and columnist and adjunct scholar with the Indiana Policy Review Foundation. Contact her at


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