October 25, 2008 / 12:39 AM / 9 years ago

UPDATE 2-US government tells states not to privatize lotteries

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NEW YORK, Oct 24 (Reuters) - The U.S Department of Justice has told states that federal law bars them from privatizing lotteries, a money-raising strategy several hoped to use for investments in education, roads, bridges and the like, Indiana's Republican governor said in a statement on Friday.

The federal Office of Legal Counsel determined "that states may contract with private management firms to operate their lotteries, but that the state must maintain control over significant business decisions made by the lottery," Gov Mitch Daniels said in a statement.

Daniels added: "In addition, the opinion says that the management firm may not receive more than 'a de minimus interest in the profits and losses of the business.'"

The list of states that have weighed long-term leases for their lotteries includes: California, New Jersey, Illinois, Colorado, Florida, Michigan, Texas, New York, and Indiana.

Gaming companies are eager to lease state lotteries because they say they can make them more profitable by selling tickets via cell phones and adjusting the games offered.

Privatization has gained momentum this year as the economic slowdown reduces state and local tax collections that traditionally pay for building or upgrading schools, highways and commuter trains.

Though the new legal opinion is not binding, Daniels, who wanted to privatize the lottery to raise $1 billion to help pay for college scholarships, said he would pursue other strategies instead of a court challenge.

The state with perhaps the most at risk from the new legal opinion is California, which plans to sell $5 billion of debt backed by lottery payments to shore up its budget. Voters must approve this plan, which might be put on next year's ballot.

A spokesman for Republican Gov. Arnold Schwarzenegger said California believes it could still go ahead because its plan would keep the lottery as part of the state government.

"In our view it is in no way any legal impediment," said Spokesman H.D. Palmer. "We're not proposing to privatize the lottery."

Schwarzenegger had initially proposed leasing the lottery's operations to a private-sector company but then decided on keeping the lottery under government management while selling debt backed by its revenues, in part because California has experience in issuing debt on revenues it receives as part of the landmark settlement with the tobacco industry.

Similarly, a plan by Illinois Democratic Gov. Rod Blagojevich to raise $7 billion via a partial lease of the lottery also might survive. A Blagojevich spokeswoman said: "We will review the advisory opinion before any comment, but we believe the facts and circumstances of the Illinois lottery lease proposal are different than Indiana proposal."

Privatizating state assets has a mixed record in the United States, though this approach is fairly common overseas. Virginia and Florida are forging ahead, privatizing roads, bridges and tunnels, and Chicago recently leased its Midway Airport for $2.5 billion. But plans to privatize the New Jersey and Pennsylvania Turnpikes failed after proving unpopular.

(Additional reporting by Karen Pierog in Chicago and Jim Christie in San Francisco)

Reporting by Joan Gralla; Editing by Diane Craft

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