Governor Christie Selling the New Jersey Lottery Off Cheap

John Celock reports on another controversy in New Jersey:

Organized labor is attacking New Jersey Gov. Chris Christie's plan to privatize the state lottery with a new ad that began airing statewide on Monday.

I’ll let Governor shouts a lot do battle with this labor union as we focus on the long-run finances of this deal. The AP reports:

New Jersey is considering privatizing the state's lottery in a move that could bring the state $120 million up front….The contract to run the New Jersey Lottery, the 8th-largest in the country, would begin as early as March 2013 and last until 2029. It would be a gamble for the company. The more the lottery brings in, the higher percentage of the income the company would be able to keep. But if income projections are not met, the company would have to pay a penalty. The state estimates that a company could make more than $1 billion over the life of the contract. It's not clear how many of the New Jersey Lottery's 150 employees would lose their jobs. But the state estimated that expenses would drop to $13 million a year from the current $37 million.

Another discussion notes:

The single bidder was a joint venture composed of GTECH and Scientific Games International — two lottery operating companies — and the Ontario Municipal Employees Retirement System, a large pension fund … Beginning in August, the Treasury sought proposals for a company to oversee the lottery’s sales and marketing operations. The winning company would have to pay $120 million up front and follow a state law that requires at least 30 percent of lottery revenues to be paid to the state’s social and educational programs. In exchange, the company could take as much as 5 percent of the lottery’s net income … The lottery took in $2.7 billion of revenue in the last fiscal year – about $313 for every resident of the state – with $950 million of that going to support state social and educational programs.

$120 million up front is all the state government gets? $10 million per year for 17 years discounted at 4% is approximately $120 million. This is an exchange for a lottery program that generates $2.7 billion in revenue. OK – profits will be a lot less than revenues but these stories still suggest the joint venture may get $50 million a year in profits. Why does this remind me of the privatization of toll roads? A few years, I wrote about the Indiana plan to privatize its toll roads. I still think Daniel Gross got this controversy right:

What's in it for the foreign companies? Huge potential profits. Gigantic, steady profits. Toll roads are an incredible asset class … According to Cintra, the Indiana Toll Road generated $96 million in revenues in 2005, and Cintra expects a 12.5 percent internal rate of return on its investment. The heavy lifting has already been done: The state or federal governments have acquired the land and rights of way, built the roads and maintained them for years, and enacted toll increases. All the private companies have to do is deliver cash upfront, maintain the roads, and collect the windfall.

The essence of his argument is that what the state received upfront from the private company that purchased these rights was far below the present value of future states receipts. Is Governor Christie playing the same fraudulent accounting with New Jersey taxpayers than Governor Daniels may have pulled in Indiana? Sure – the current state deficit falls but only at the expense of losing even more in future state revenues. And the beneficiaries will be the private companies that were allowed to rip the state off in these deals sanctioned by these Republican governors.