* The Bond Buyer has a fascinating article behind its firewall which was forwarded to me by someone at the pubication…
In an opinion that could impact revenue-raising proposals from a number of states, the U.S. Justice Department has ruled that long-term leases of state lotteries would violate federal law. […]
The 13-page opinion issued Oct. 16. can be found at [this link]. It said a statemust “exercise actual control over all significant business decisions made bythe lottery enterprise” in order to comply with the federal lottery statuteexemption.
Federal law currently prohibits the promotion and advertising of lotteries ininterstate commerce with an exemption for those that are operated by a state. In addition to maintaining control over business decisions, a state must retain a majority share in the profits and losses of a lottery, as well as the rightsto the trade marks and other essential assets of the state lottery, the rulingstated.
While federal law does allow a state to contract with a private firm to “provide goods and services necessary to enable the state to conduct its lottery, including management services,” such a company cannot receive more than a minimal interest in the profits and losses of a state-run lottery.
The House and Senate have both passed competing legislation to privatize the state lottery in order to pay for the capital construction package. This DoJ ruling puts all of that in doubt.
* Here’s the report’s conclusion…
We conclude that the statutory exemption for lotteries “conducted by a State” requires that the State exercise actual control over all significant business decisions made by the lottery enterprise and retain all but a de minimis share of the equity interest in the profits and losses of the business, as well as 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, as discussed herein. [emphasis added]
More…
As we have discussed above, we believe that the ownership by the private management company of a significant equity interest in the profits of the lottery would go beyond the scope of the exemption. We understand that some States have proposed to enter into agreements with private management firms under which the private company would assist in the management of the lottery and receive a significant share of the lottery’s profits or bear a significant share of the risk of losses.
In return, it has been proposed that the management company would make a significant upfront payment to the State or make annual disbursements to the State. We believe that such an arrangement would not be consistent with the limited exemption for lotteries “conducted by a State.” If a private management company were to oversee the lottery’s operations and receive a significant share of the lottery’s profits (particularly in return for an investment of capital), we think it clear that the company would not be a mere contractor or agent, assisting the State in operating a lottery that the State conducts, but rather a co-participant in the conduct of the lottery with substantial managerial responsibilities and a significant equity stake in the lottery’s success or failure. In such circumstances, the private management company’s incentives and ability to influence the lottery would be significant.
Where a State has a reduced stake in the profits or losses of a lottery, its incentive to exercise the actual control over all significant business decisions required by the exemption is necessarily diminished. Indeed, in practical respects, an arrangement in which the State cedes to a private firm a significant economic interest in the profits and losses of the business may be functionally quite similar to an arrangement whereby the State licenses a lottery concession to a private company. As described above, these incentives and characteristics are precisely what Congress sought to avoid in enacting the exemption for lotteries “conducted by a State.” [emphasis added]
I’ve asked for a comment from the governor’s office and will update this post with any response. The office did not offer up anything to the Bond Buyer.
However, the article reports that Indiana Gov. Mitch Daniels has now decided to drop his lottery lease idea as a result of this opinion.
*** UPDATE 1 *** From the governor’s office…
We are reviewing the advisory opinion, but we believe the facts and circumstances of the Illinois lottery lease proposal are different than the other state’s proposals.
*** UPDATE 2 *** The Pantagraph now has a story online that has a response from Speaker Madigan’s office…
A spokesman for House Speaker Michael Madigan said the federal opinion is a cause for concern, especially in light of the governor’s numerous legal battles on other policy initiatives.
‘’We don’t want to be embroiled in another costly lawsuit,'’ Brown said.
Brown said the federal decision could be used as a template to design a lottery lease plan that complies with federal law.
‘’It is certainly something that should be reviewed,'’ Brown said.
- 2ConfusedCrew - Monday, Oct 27, 08 @ 10:30 am:
We have concluded “our deal” differs from IN…of course “our deal” did not anticipate the Great Satan Madigan would put Dan & Lexi into “our deal”
so now SlickWilliew will need to razzle dazzle ‘em and rule we don’t need a new law.
Mr. Lucky, get me a new press release
- S. Illinois - Monday, Oct 27, 08 @ 10:40 am:
Is there ANY rule or ruling that the governor’s office feels applies to them? The track record suggests no. But the taxpayers (and pharmacists) of Illinois continue to foot the bill for this foolishness.
- How Ironic - Monday, Oct 27, 08 @ 10:41 am:
The King of Illinois Proclaims:
“We are reviewing the advisory opinion, but we believe the facts and circumstances of the Illinois lottery lease proposal are different than the other state’s proposals.”
It’s different in the fact that Blago lives in his own alternate universe where no rules apply.
- Heartless Libertarian - Monday, Oct 27, 08 @ 10:42 am:
Will the gov ever get it? No wonder people think he is mentally unstable. “Everyone says I can’t, but that just means that I will.”
- Dan S. a Voter and Cubs Fan - Monday, Oct 27, 08 @ 10:46 am:
We already know the Gov pays zero attention to the Illinois Constitution, but is he really willing to test the US Constitution when he is under Federal investigation?
- Bluefish - Monday, Oct 27, 08 @ 10:47 am:
“Different” in that Blago wants to lease it to a company that would in turn give him a large “contribution” thus sort of keeping some of the profits in the “governments” pockets.
- wordslinger - Monday, Oct 27, 08 @ 11:06 am:
Somebody didn’t conduct the due diligence.
- walter sobchak - Monday, Oct 27, 08 @ 11:06 am:
A naive and nanny state federal opinion that is ridiculous on its face. Almost all lottery game and marketing decisions have been made by lottery vendors for years. Not just in Illinois but all over the world. They have almost total control of lottery activities. Read the NYT series on lotteries from a year ago. Federal laws limiting interstate advertising of lotteries sprung from the fraudulent activities of ‘national’ private lotteries of the late 19th century and were anachronisms that were logically overcome with the introduction of state run lotteries in the sixties. States should be allowed to run their lotteries as they see fit without idiotic interference from federal bureaucrats. Whether leasing or selling a lottery is a wise or dumb idea is for the people of a state to determine through their votes or ticket purchasing decisions.
- Rich Miller - Monday, Oct 27, 08 @ 11:11 am:
=== without idiotic interference from federal bureaucrats.===
While I do not believe you are an employee of the governor’s office, I would highly recommend that the governor not call the Dept. of Justice “idiotic” considering the US Attorney General holds the governor’s fate in his hands.
Just sayin’
- OneMan - Monday, Oct 27, 08 @ 11:17 am:
After reading this you might be able to do something related to selling the cash flow but where the leasor has no operating rights/say in the lottery at all.
Suffice to say, this puts another discount on the price.
- VanillaMan - Monday, Oct 27, 08 @ 11:18 am:
Suppose we had enough money to pay our bills this year. Exactly what changes will be put into effect to prevent our current situation from reoccuring again?
I’m not seeing anything to encourage me into believing that a lottery sale will help. The waste and fraud within this corrupted state government is not being addressed! Selling our assets to pay for what we need because our credit is exhausted is fiscal suicide!
Selling the lottery is no solution. Selling any other state assets to cover up the fiscal mismanagement rampant in the governor’s office and the General Assembly is not fixing anything.
So, I guess it is challenging for me to care about the legal impact of this ruling.
- One of the 35 - Monday, Oct 27, 08 @ 11:19 am:
In a definate pattern, the Governor, once again, seems to think that he may pick and choose which laws he will obey and which he will disregard. Hey governor, It’s not your call! That’s what we have the courts for!
- Macbeth - Monday, Oct 27, 08 @ 11:21 am:
It’s unfortunate that the governor thrives on the word “no.” Now this will be a holy mission — and the battle lines will be drawn.
What would be interesting — and what would probably go a long way toward re-establishing the trust of his so-called “people of Illinois” — is accepting the “no” — and then suggesting something that gets a resounding “yes.”
Blagojevich should investigate the possibilities of “yes.” It’s far more powerful.
- walter sobchak - Monday, Oct 27, 08 @ 11:31 am:
I hope you were trying to be humorous rather than cynical. But, if that cynical you surpass Oscar Wilde’s definition. Thanks, barely, for leaving an opening in your world view that opinions differing from yours might not be confined to members of the administration. I guess I could have written about the advisory what one eminent cosmologist said about a new hypothesis of the beginning of the universe: it isn’t even wrong.
- DzNts - Monday, Oct 27, 08 @ 11:32 am:
I wonder if the Governor thinks federal jury verdicts are advisory too?
- Arthur Andersen - Monday, Oct 27, 08 @ 11:38 am:
AA, and others, tried to warn the Blago braintrust nearly a year ago that there were manifest problems with this deal, including the value of the lease payments (overstated) and the structure of the deal, which gave away too much control to the private lessee. The input was rebuffed.
Stick a fork in the Lotto lease, baby, it’s done.
- Six Degrees of Separation - Monday, Oct 27, 08 @ 11:42 am:
The Tollway, next. It’s legal and has been done in Chicago as well as next door in IN. Maybe McPartlin left at an opportune time after all.
- Just My Opinion - Monday, Oct 27, 08 @ 11:44 am:
What did Walter just say?
- The Doc - Monday, Oct 27, 08 @ 11:55 am:
Walter, your argument is that because states have, in your opinion, continually thumbed their collective noses at lottery laws without repercussion, provides legal grounds for states to continue violating federal statutes? Huh?
I’m also unsure of your citing of 19th century lotteries, foreign-based lotteries, and reference to “marketing” decisions in support of your stance. They don’t appear to be material. The bond buyer article clearly indicates it’s the equity share and payment provisions of the law that are the critical components.
Of course, even if such a law did not exist, it’s a terribly short-sighted and fiscally irresponsible idea.
- walter sobchak - Monday, Oct 27, 08 @ 12:36 pm:
The Justice Department ‘believes’ that they have discovered legal reasons that may make state plans to privatize their lotteries as violating current statutes and previous rulings. A quick reading as to the basis of their belief gave rise to my original comment. The advisory continuously cites the history of 19th private lotteries as the basis of federal regulation and as to their concern with ‘leasing’ lotteries. The advisory seems hypocritical in light of how lotteries are operated and a stretch of federal legitimacy when dictating equity arrangements. Lotteries are currently operated irresponsibly and are dependent on a small ethnic audience who they market too with promises of good odds and ‘winning.’ I am not suggesting that leasing the lottery as the Governor has tried is either good public policy or good business practice, just that the federal government should keep its nose out of it.
- Anon - Monday, Oct 27, 08 @ 2:28 pm:
Walter, the opinion summarizes the history of the federal laws, but it also makes clear that the federal authority for adopting those laws is the commerce clause. A strong proponent of states’ rights could argue that federal authority under the commerce clause should not be allowed to trump state sovereignty if the state wants to conduct a lottery, but even that position would not allow private operation of a lottery in violation of the federal laws.
- Vote Quimby! - Monday, Oct 27, 08 @ 3:26 pm:
==another costly lawsuit==
Right on! Did we learn nothing from FamilyCare? From what I read, I see no way anyone would pay any significant amount for what the feds will allow. Goodbye, capital bill! Maybe the next governor can get one done…
- Louis G. Atsaves - Monday, Oct 27, 08 @ 4:45 pm:
Interesting article in the Trib today about airport revenues declining due to the decline of air travel and the number of flights.
Which begs the question. State income this fiscal year. Declining or rising. If the state cannot legally lease out the lottery and grab a huge chunk of cash in the process, then what is “Plan B” or is it Plans S, T, U. V. W?
If revenue is declining then all that extra spending tacked onto the budget will be an even larger problem than before.
- Six Degrees of Separation - Monday, Oct 27, 08 @ 5:28 pm:
Louis-
The nearly 300 mile Illinois tollway system might fetch several billion on a long term lease. Indiana leased its system for nearly $4 billion and it is only 160 miles long with not nearly the traffic potential as the heavier parts of the IL system. There are not any other liquid assets the state could lease (like the state lottery) that would come close. At this point, the $10 billion speculated to result from the lotto lease is not likely to happen. And the gambling market is probably saturated such that, even with new Chicago and Rosemont casinos, and increasing gaming positions at other casinos, the state could probably not realize more than an additional $1 billion or so. I doubt the state would get anywhere by leasing out any of its other services to a private entity to provide a short term cash infusion…too many issues with unionization, etc.
- Smitty Irving - Tuesday, Oct 28, 08 @ 7:15 am:
If one listens hard enough, one can hear the figurative breaking of crockery and gnashing of teeth coming from the Governor’s budget wizards. Another leak in the budget?