Indiana Governor Proposes Privatizing Lottery for College Scholarship Fund

CHICAGO - Indiana would privatize its state lottery or issue bonds backed by future lottery growth to fund a new college scholarship fund under a proposal set forth this week by Gov. Mitch Daniels.

In 2007, Daniels, a Republican, floated a similar lottery lease proposal that died in the General Assembly. This week some legislative leaders predicted the lottery lease still lacks the necessary political support, while the bonding proposal could gain traction.

Some of the Democratic opposition stems from a larger debate over the privatization of state assets, which Daniels has pushed since taking office, leading to private companies now running the Indiana Toll Road and the state's Family and Social Services Administration. Democrats control the House and Republicans control the Senate.

The proposal comes as other states are considering selling or leasing their lotteries, including Illinois, New York, Vermont, California, and Puerto Rico.

Daniels this week said he would ask the next General Assembly to approve his Hoosier College Promise program to provide scholarships for middle-class Indiana high-school graduates. The next legislative session gets underway in January, although Daniels first faces re-election in November.

Estimating the program would cost $50 million a year, Daniels proposed the state enter into a 30-year lease of the Hoosier Lottery or issue revenue bonds. Under the tentative terms of the lottery proposal, a private company would pay the state at least $1 billion in up-front cash as well as $200 million a year in payments - the amount that the lottery currently generates in annual profits.

On the alternative bond proposal, officials said they have yet to determine the size of a bond issue, but that revenue bonds would be backed by the state and paid by future growth of lottery revenues.

"We haven't put tighter specifics on the lease agreement, that's something the governor has ideas about but he'll work with the General Assembly on ideas that they have," said Jane Jankowski, the governor's spokeswoman. "The proposal is based on assumptions we made two years ago, that we would get an up-front fee of $1 billion - it could be substantially more than that - in addition to the annual revenue fee."

So far the state is not working with a financial team on the deal, Jankowski said. In 2007, the state worked with Morgan Stanley as its financial adviser on the proposal.

Currently the Hoosier Lottery generates roughly $200 million a year in revenue, which goes toward police and pension payments, reducing local motor vehicle excise taxes, and in the past, state and local capital projects.

If the state issued bonds for the scholarship program, the debt would be repaid from growth in the current $200 million of profits generated annually by the lottery, Jankowski said.

That assumption of growth is a problem for House Speaker B. Patrick Bauer, D-South Bend, who says gaming revenues across the state -like the rest of the Midwest - are down. Both proposals rely on an expansion of gaming.

"The problem with privatizing statewide gambling operations is to make a profit you're going to have to create a lot more losers, which creates a lot more social problems," Bauer said.

"The bonding thing has a little more merit, as the state still controls it, and it's not for as long a period of time," he said. "We might look at it."

Bauer praised Daniels' idea of starting a college scholarship fund as well as the relatively low cost of $50 million a year.

Bauer called the state's privatization of the Indiana Toll Road - which generated a $3.8 up-front cash windfall for the state - a "disaster."

"They have it for 75 years, they have the right to tax and can increase the toll, it's poorly run, last winter one lane was open, and there's been lots of complaints," Bauer said, adding that he had suggested bonding as an alternative to leasing at the time. "This one is even worse."

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