News Story

State Debt Alert! Beware Massive Borrowing Disguised As “Lottery Privatization”

In the past few days, politicians in the Republican-controlled Michigan Legislature have begun murmuring about “lottery privatization.” Don’t be misled, however – this has nothing to do with saving money by contracting out operation of the Michigan lottery to a private company.
The fact that the talk is coming from appropriations committee members angsting over spending cuts is suggestive of what’s really being contemplated:
Debt. Hundreds of millions or even billions of dollars of new borrowing that future Michigan taxpayers will have to repay.
The borrowing would be done by pledging to lenders some or all of the lottery revenue for years or even decades into the future. In return, the lenders would write up-front checks that the politicians could start spending right now.
As part of the scheme, a lender would also operate the lottery, just as in good-faith privatization programs, but that’s just cover. You can tell because, depending on the size of the loan, rather than flowing into the state Treasury, some or all of the future lottery revenue would go into the pockets of the operator to repay the interest and principle on the debt. Depending on the size of the loan, the amounts would be tens or hundreds of times more than the few millions a private company would earn each year for just managing the lottery.
The clincher is when the arrangement also involves turning over the operation for decades into the future. Hardly any legitimate management outsourcing contracts extend more than five years or so, at the end of which the state can choose to renew or not depending on the manager’s performance. Because of the debt owed in these loan-masquerading-as-privatization deals, the state has essentially no recourse if the lender/operator causes problems.
As for future taxpayers deprived of up to $700 million in annual lottery revenue that currently supports public schools — too bad: They have no representation in these borrow-and-spend discussions.
To be sure, the politicians will swear on stacks of Bibles that those big up-front loan proceeds will go right into an airtight “lockbox,” with ironclad guarantees to spend the money gradually and only for specified Really Important Things. Many lawmakers will even believe it themselves as they assure taxpayers that this money will never be tapped for any other purpose. Unless, that is, during some future budget “crisis” a simple majority of lawmakers plus the governor agree that dipping in is easier than finding more spending cuts.
There are already quite a few such ‘lockboxes” enshrined in state statutes, called “restricted funds.” The Legislature never, ever taps these funds to cover other spending … never more than a few times a year, that is. (See also “How Fees Fuel Big Government.”)
Handing politicians pools containing hundreds of millions or billions of dollars is never a good idea. When the cost of doing so is massive interest and debt service payments imposed on taxpayers for decades to come, plus the loss of ongoing revenue from a lucrative source like the lottery, it's an even worse one.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.