Schwarzenegger's lottery idea questioned

Gov. Arnold Schwarzenegger is dramatically overestimating the jackpot the state could collect if it sold the rights to operate the lottery to an outside company, according to confidential Wall Street analyses.

Moreover, to make the venture more attractive and command a higher price from an outside company, California might have to relax its gambling laws and allow a major expansion of the lottery — meaning, some critics say, that Schwarzenegger would be balancing the budget on the backs of the many poor people who avidly buy tickets.

With California facing a $14.5 billion shortfall that threatens to force the early release of tens of thousands inmates and close parks, legislative leaders are considering Schwarzenegger's proposal to lease the lottery to the highest bidder for what he says could be an eye-popping $37 billion — half up front, the rest presumably in fixed annual installments.

Schwarzenegger introduced the idea last year, and at times he has pitched it as a financial godsend, capable of reducing state debts, boosting education funding or helping to bankroll universal health care. If the deal comes to pass, it will be the first time a state has privatized its lottery.

But several Wall Street investment banks that have analyzed the idea for Schwarzenegger's administration say the estimate he touts is wildly optimistic. The documents were obtained by The Associated Press through a public records request.

The governor is employing the rosiest of projections from Lehman Brothers, which pegged the value of California's lottery at $16.1 billion to $37 billion over 40 years.

Other Wall Street investment banks — Bear Stearns, Citibank, Goldman Sachs, JP Morgan Chase, Merrill Lynch and Morgan Stanley — were more conservative. Most estimated the value of a long-term lease at between $7 billion and $29 billion, with smaller upfront payments, usually less than $9 billion.

State Sen. Leland Yee, a member of a committee that oversees the lottery, said that Schwarzenegger has oversold its value and that lawmakers must carefully weigh if privatization is worth the social cost.

"You have to be honest about the number and have to be careful about how you get that money," he said. "The increased revenue is predicated on maximizing the lottery. Unfortunately that maximization is on the backs of poor people and working poor — people who need to save their money for their children, rather than toss it away on buying lottery tickets."

Asked about his regular use of the sunniest projection, Schwarzenegger on Tuesday downplayed the $37 billion figure. "That number was thrown around and other numbers like this were thrown around about the lottery last summer," he said. In fact, Schwarzenegger has used it repeatedly since then, and late last year incorporated it into his universal health care proposal.

Schwarzenegger predicted the Legislature would consider a lottery lease to deal with the budget deficit.

"I don't know what the current value is, but one thing I know for sure is we should be making much more money on the lottery than we are making right now," he said. "We would be foolish not to take advantage of that and not use some of this money for education and for health care and other things where we need the money. I think, `Why are we waiting?'"

California's lottery ranks fifth nationally in total sales, with $3.3 billion, even though it is the most populous state. In fact, on a per-capita basis the lottery ranks 30th, with about $98 in tickets sold for every Californian.

The Wall Street analysts said that to command the highest price for the lottery, California would have to give a private operator freedom to sell tickets over cell phones and PDAs, in malls, on college campuses, at bus stations and through ATM machines. Ticket sales would have to more than double, to $234 per person.

That worries some in California. Many already see lotteries as a tax on the poor and gullible.

"We're deeply concerned that the state is looking to gambling — to lower-income Californians — to make up a disproportionate contribution toward balancing the state budget," Jean Ross, executive director of the California Budget Project, which lobbies for poor and middle-income families.

Leasing the lottery would require approval from the Legislature and a majority of the voters. Similar proposals are circulating in more than a dozen other states, New York, Florida and Texas among them.

"There's a reason no state has yet gone through with this," said state Sen. Dean Florez, chairman of the committee that oversees the lottery. "Putting lottery terminals in malls in every floor, where pay phones used to be, that raises serious questions."

In California, the burden of making a profit would fall on the lottery company. Under most of the proposals, the state's share would be a fixed amount, negotiated in advance, and would not depend on how well the lottery does while in private hands.