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To pay for the construction plan, lawmakers were considering Gov. Rod Blagojevich’s multibillion-dollar proposal to expand gambling and lease of the state lottery.

Included in the mix was the possibility of adding three new casinos, including one in Chicago, one in its suburbs and one in a downstate city.

* Opposition from casinos…

The Illinois Casino Gaming Association opposed both the House and Senate bills, saying they add too much gambling to an already-shrinking market.

* House Speaker Madigan ain’t happy, either…

Madigan reiterated the reason behind lawmakers’ hesitation: “It’s all about trust. It’s all about trust and whether people are prepared to trust Gov. Blagojevich and trust his record of broken promises.”

* Another Lottery shell game?

The state would lease out its rights to upward of 80 percent of the state lottery proceeds for nearly 65 years in exchange for at least $10 billion upfront, with $3 billion set aside for education and $7 billion for construction projects.

So, how much does the lottery bring in annually?

The answer: $600 million. […]

But whoever ends up with the lottery, will likely make at least three times that much over the course of this deal.

80 percent of $600 million is $480 million. Multiply that by the possible length of the lease (65 years) and you get $31.2 billion.

So the state’s giving up $31.2 billion for $10 billion now.

posted by Rich Miller
Saturday, May 31, 08 @ 7:51 am

Comments

Blagoof dropped in a unrequested $150 hospital construction program last night that sent heads spinning. Admin announced program was supported by the Hospital Assoc.
Surprise
So What
None of those who need to vote for this mess seemed too excited. Insiders say The President blasted Blagoof for the bungle.

Comment by Capital Bill Saturday, May 31, 08 @ 8:31 am
Lottery lease sounds like a great deal for the buyer. The State, lottery players and the people of Illinois get screwed. Sounds to me like Blago, Emil and GTECH will be laughing all the way to the bank. But, then again, what else is new??

Comment by Champaign Mike Saturday, May 31, 08 @ 8:57 am
“Capital Bill” is funny - you guys are working overtime trying to kill this thing through the media.

Must be a sign of weakness…

Comment by jj Saturday, May 31, 08 @ 9:02 am
To be fair, the $600 million increments of that $31.2 billion that would be traded for upfront cash probably won’t be worth much in today’s dollars in the year 2070 or thereabouts…assuming state lottery revenues are stagnant for the next 65 years in actual dollars.

However, if the state could keep the lottery and grow its revenues to keep up or ahead of inflation, the trade doesn’t look as good.

Comment by Six Degrees of Separation Saturday, May 31, 08 @ 9:05 am
the $600 million increments

…which are actually $480 million increments minus the share retained by the state.

Comment by Six Degrees of Separation Saturday, May 31, 08 @ 9:07 am
“So the state’s giving up $31.2 billion for $10 billion now.”

Rich - $10 billion, at 5% interest, over 65 years, is $238 billion.

Just inflation alone (3% a year), would make that $10 billion worth $68 billion in 2073 dollars.

Comment by jj Saturday, May 31, 08 @ 9:15 am
In order for the state to grow lottery revenue it would have to expand the distribution system, have more games with smaller payouts, and greatly increase marketing to increase sales. These are things that the state has been unable or unwilling to do but which a private operator could accomplish fairly easily. Sales have been flat for a few years now and, I predict, will continue to be flat or drop unless the above are done. The state should not be in this business in the first place. Add in the cost savings from its somewhat bloated and unefficient operation and the lease is a good deal for the state.

Comment by Bill Saturday, May 31, 08 @ 9:24 am
jj, I must say, I love your reasoning:

Rich - $10 billion, at 5% interest, over 65 years, is $238 billion.

You are so right jj, we all know that money will sit in the bank and earn interest. Gosh, what were we thinking.

I have to get to the bank before noon. I am going to write a check for $10 billion and let Blago invest it for me.

jj you have to be kidding.

Comment by Champaign Mike Saturday, May 31, 08 @ 9:50 am
I wish I could understand why the elected inhabitants of the Statehouse can’t understand that not only do we need money to pay bills, we need to stop wasting money. I never hear or read that anyone of these people have come up with any cost-saving ideas for this state. I guarantee if you asked the rank and file state employees, they could come up with dozens. But no one asks them and if they take it to a supervisor, it either is pooh-poohed or they slap their name on it and take credit. Then it all falls into the dark hole of committees. Selling state assets and borrowing to fulfill commitments is fool-hardy. It’s the payday loan concept in state government. Just stop the unnecessary spending and use some creative and workable ideas to reduce costs. The taxpayers do this at home every day. Surely these so-called leaders, all of whom are supposedly educated people, can do the same and save this state from bankruptcy.

Comment by Disgusted Saturday, May 31, 08 @ 9:54 am
Champaign Mike -

I was pointing out the foolishness in John Patterson’s math and reasoning.

He was using 2073 dollars vs. 2008 dollars. That’s just ridiculous to do and shows a complete lack of understanding of finances and money in general.

You can’t possibly be defending him…

Comment by jj Saturday, May 31, 08 @ 10:05 am
Champaign Mike,

You are correct that the state is not going to “invest” $10 bn. and let it mature over 65 years in a financial instrument. However, capital projects like buildings, if bought, do have a capital value and may appreciate considerably in value over that course of time. Some items, like roads, bridges and transit facilities, have a tendency to deteriorate over time but could provide serviceability throughout the investment period if built stoutly enough, and promote the general economy and welfare of the state.

Comment by Six Degrees of Separation Saturday, May 31, 08 @ 10:42 am
It’s not like the state’s using the lottery lease to pay down debt or balance the budget. It’s using it to buy MORE stuff.

Comment by Michelle Flaherty Saturday, May 31, 08 @ 10:45 am
Michelle-

Also to be fair, a lot of the capital program is to buy new stuff to replace worn out or obsolete stuff that doesn’t function well anymore.

Not defending capital projects of questionable value, or questionable methods of financing here.

Comment by Six Degrees of Separation Saturday, May 31, 08 @ 10:57 am
The bottom line is that none of our elected Senators and Representatives will have a clue on what they are ultimately voting on, other than their leadership and budget negotiators.

What a system.

Comment by Louis G. Atsaves Saturday, May 31, 08 @ 11:31 am
How about the “downstate” casino go to Benton and leave IDOT’s Traffic Safety in Springfield. Now that would surely get Gary Forby re-elected.

Comment by Little Egypt Saturday, May 31, 08 @ 11:35 am
The lottery is a cash cow. Suckers willingly give you money every day. Why would you give that up for a one-time bump? Rather than leasing, why not just pledge a portion to a Revenue Bond issue for capital projects?

Comment by wordslinger Saturday, May 31, 08 @ 11:41 am
Rod and his finance team have been watching too many J.G. Wentworth commercials.

Comment by Gregor Saturday, May 31, 08 @ 11:44 am
Don’t pick on Patterson. He’s a journalist, not a financial analyst.

The way real numbers crunchers crunch a deal like this is to figure out what the value of the stream of payments is worth today compared to the value of the asset. According to AA’s handy financial calculator: 65 annual payments of $480 million at the State’s borrowing rate of 6% reveals 80% of the Lottery is worth: (drum roll)

~$7,818,780,000.00~

Oops.

On one hand, this back of the envelope calculation assumes no change in revenue. Also, there are numerous qualitative factors that could affect the actual value of the Lottery to a private operator.

On the other hand, as the Speaker said, it’s all about trust. Is there anyone left who trusts Filan’s fiscal follies?

Comment by Arthur Andersen Saturday, May 31, 08 @ 12:30 pm
The assumption in the gambling and lottery issues is that they will keep growing and bringing in more money from people facing other rising expenses in their life. The potential dollars sound great and easy to talk about. Where are the customer projections of the number of butts in the seats needed to actually generate those dollars? There are enough people to consistently fill 3 additional casinos and drop lots more money? They talking 3 Trump/Wynn style LV mega casinos or more boats at the dock? And that guy with the $5 lottery pop at the store…he’ll still be buying 3 of those in 3 years when the price goes to $10 while gas is $7 a gallon and cigs are $15 a pack, right?. Please. Must be orange koolaid in the glass next to that Excel spreadsheet. Got Blue Moon in mine.

Comment by zatoichi Saturday, May 31, 08 @ 12:42 pm
You ALL FAIL!

Apparently you missed the class, or were sound asleep, during the lecture on PRESENT VALUE.

Whomever would be submitting a bid would be paying in 2008 dollars, not in 2073 dollars. So the investor would value the stream of future receipts in those (2008) dollars.

Using the numbers cited, an 80% interest in a $600M per year stream of future earnings for 65 years at 5% interest yields a Present Value of $9.197 billion (rounded). That is what an investor would be willing to pay in 2008 dollars.

The discount rate (5% in this example) would typically take into account alternate investment opportunities, risk and inflation, among other factors. As such, one could obviously argue for a higher discount rate. So let’s assume a 9% rate, rather than 5%. At a 9% discount rate, a rational investor would be willing to pay up to about $5,314 billion (again rounded). So if Blago can net $10 billion, that’s a great deal for the State.

Homework Question for bonus points (since you all failed the first exam): What is the discount rate that would give you a $10 billion net present value?

Comment by Professor of Finance Saturday, May 31, 08 @ 12:49 pm
Amendment;

Just saw Arthur Andersen’s post. At least someone was awake during that class. A+ to AA!

Comment by Professor of Finance Saturday, May 31, 08 @ 12:53 pm
Professor: 4.53%.

Comment by Arthur Andersen Saturday, May 31, 08 @ 2:00 pm
Lottery just passed 43-8-3.

That landslide just made that ledge Madigan is standing on even smaller…

Comment by jj Saturday, May 31, 08 @ 2:15 pm
They must have read AA’s and the Professor’s comments.

Comment by Bill Saturday, May 31, 08 @ 2:56 pm
My question is far simpler than future time value of money.

What revenue will plug the $480 million ANNUAL hole when we divert 80% of the lottery revenue?

Comment by plutocrat03 Saturday, May 31, 08 @ 3:26 pm
plutocrat03, the state will retain partial ownership, and put some of the sales proceeds in a trust fund.

Comment by Rich Miller Saturday, May 31, 08 @ 3:31 pm
The way to make this work is to invest enough of the 10 Billion to produce the 480 million per year they are giving up-Then no harm done.

Comment by SIUPROF Saturday, May 31, 08 @ 3:33 pm
Pluto hits it right on the head…what will replace the lottery money that is currenty used in the annual budget?

Comment by some former legislative intern Saturday, May 31, 08 @ 3:34 pm
I just did.

Comment by Rich Miller Saturday, May 31, 08 @ 3:35 pm
“The way to make this work is to invest enough of the 10 Billion to produce the 480 million per year they are giving up-Then no harm done.

Can’t be done. If you could make $480 million per year for investing $10 billion in the stock and bond market, for doing essentially nothing, why would you pay Illinois $10 billion for the chance to get the same stream from the lottery, where you will actually have to run the lottery, possibly with the interference of the State? If you wouldn’t do that, how could the state get $480 million per year from investing only PART of the $10 billion?

The only way this can work is the way Bill described it — the new lottery owners would have to expand games and marketing. He claims the State can’t do that, which may be true, but it begs the question of whether some of the expansion would be in areas we don’t want to go. Which raises two questions — why should we let them expand into areas we don’t want to go ourselves, and why should they pay us $10 billion when there is a possibility that the state won’t let them expand the way they would want to?

Comment by Just Me Saturday, May 31, 08 @ 7:10 pm
SIUPROF–But then the money invested can’t be used to service the bonds for the capital program, or for paygo capital. You have to invest about $8B at current rates to generate the $480M annually, and as a previous post said, at a 6% discount rate the deal is only worth about $7.8B. Why bother?

Rich–You can’t turn 20% into 100% that easily, the $480M is lost to the GRF. If you put part of the sales proceeds into a fund and use the interest to make up the rest, you won’t have much left for capital.

The whole thing is a bet that the State is not competent to get full value from the Lottery and someone else can do a lot better. Has anyone seen the basis for the $10B estimate–not just the level of Lottery winnings a private operator might achieve, but that those expectations are reasonable (like, some comparables?)

And we’re gonna issue 30-year debt on this basis?

This whole thing just seems like rectal extraction.

Comment by A real financial analyst Saturday, May 31, 08 @ 8:06 pm
And don’t even get me started on the goofy math in the gaming bill.

Comment by A real financial analyst Saturday, May 31, 08 @ 8:08 pm
The problem with the “trust fund” idea is that it is too similar to the “pension fund” idea. The state promises to deposit funds for a specific purpose but when the time comes for that to happen, many sleights of hand can and will take place and it the funds will be diverted. You can’t fool us too many times.

Comment by NoGiftsPlease Saturday, May 31, 08 @ 8:43 pm
Thank you very much, real financial analyst.

Fortunately, this eleven-figure shell game has met its just fate.

Comment by Arthur Andersen Saturday, May 31, 08 @ 8:51 pm
I’m glad others pointed out the circular reasoning about using the 10B to generate what is lost.

Another aspect to consider is that we are living in an age of budget sweeps and redirections. How long would it be before some governor or legislator would want to tap into that reserve fund?

Comment by plutocrat03 Saturday, May 31, 08 @ 9:33 pm