Questions Surround Idea of Privatizing the Lottery

ALBANY — Can New York hit the jackpot by selling its lottery?

Skip to next paragraph Christian Hansen for The New York Times

Governor Spitzer has proposed privatizing the lottery.

Wall Street certainly thinks so. Ten investment banks that have lobbied state officials believe that the state could reap billion to billion now by agreeing to give up a share of future proceeds from its lottery system for the next three to four decades.

Wall Street’s pitch is that a private investor would pay the state a premium for a part of the revenues and management control of the operation. Gov. Eliot Spitzer envisions using billion as a systemwide endowment for the state’s higher education system, then investing the rest of the money in a diversified fund aimed at yielding the roughly billion now generated annually by the lottery system for kindergarten-through-12th grade education.

“We should unlock some of the value of the New York State Lottery, either by taking in private investment or looking at other financing alternatives,” Mr. Spitzer said in his State of the State address this month. “As we do this, we will assure that the state continues to regulate all lottery games.”

In essence, a private company, or more likely, a consortium, would be trying to make the state’s lottery system more profitable over the next several decades by taking over management from state bureaucrats. To entice the state to go along, the private investors would have to pay a lump sum large enough to be worth the state’s trouble.

Governors across the country have been tempted by the potential, but there has been criticism of proposals to use lump-sum payments to erase short-term budget gaps.

Gov. Jon S. Corzine of New Jersey briefly considered privatizing the lottery to try to erase his state’s enormous debt, but instead has recently proposed to increase highway tolls over the next 15 years.

In Mr. Spitzer’s proposal, the fund would be used to create an endowment, not to patch a problem. But it would inevitably be paid for by an expansion of gambling, which the private-sector partners would be expected to seek aggressively. New York’s lottery already produces more annual revenue, about .8 billion, than any other state in the country. The lottery proposal is part of a broader plan the governor laid out this week to expand gambling, including a proposal to allow the Belmont Park horse track to install 4,500 video slot machines.

Potential concerns about the lottery plan boil down to two categories: Are state officials willing to accept an expansion of state-sponsored gambling if it helps provide financing for education? And what are the risks of such a deal? That is a question that is hard to answer until more details emerge.

“This is an idea that I would say every major Wall Street firm has come to us and said, ‘You really should consider it,’ ” said Paul Francis, the governor’s operations director and an architect of the budget effort.

Of course, Wall Street’s credibility is not exactly at a high point, especially when it comes to financial engineering. The complex instruments that the major investment banks built around subprime mortgages have blown up in their faces, leading to tens of billions of dollars in losses. This deal appears less complex — no derivatives involved —but while it has been considered in a number of other states, it has never won legislative approval.

Lawmakers are not rallying around the idea, and many are eager to see a more detailed proposal.

Sheldon Silver, the Assembly speaker and the Legislature’s top Democrat, expressed reservations about both the lottery proposal and the governor’s plan to impose a ceiling on local property tax increases, another major source of aid for local school spending.

“In the end, what is it we are actually doing?” Mr. Silver asked of the lottery proposal. “Are we tapping funding for K-12? That and tax caps, that’s two hits on K-12. Again, I’m not a financial wizard, but the logic of it I’m still trying to figure out.”

John McArdle, a spokesman for the Senate majority leader, Joseph L. Bruno, the state’s top Republican, said: “This kind of proposal is being bandied about as a source of revenue, but it’s never been attempted. Forgetting whether or not it’s a good idea from a public-policy standpoint, there’s an awful lot of questions.”

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