* 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.