CHICAGO - Illinois Gov. Rod Blagojevich reported on Monday that his council of economic advisers believes an infrastructure program is the state's best bet to counter the job and revenue losses expected from an economic recession.
But the governor made no mention in his news release of the recent advisory opinion from the U.S. Justice Department that has dampened the outlook on the leasing of state lotteries as a means to raise upfront cash - the fiscal cornerstone of Blagojevich's proposed capital budget.
Federal authorities said states must maintain a majority ownership in order for a lease to be legal. Illinois' proposal would run afoul of that opinion because it anticipates the state would maintain ownership of just 20%.
"The council told me that our state has an economic battle in front of us, and they reinforced that the best thing we can do for our workers is to invest in infrastructure," Blagojevich said in the statement on his meeting with council members last Thursday, when they discussed the effect of the economic slowdown on the state.
"The sooner we get started on an infrastructure program, the more we can limit damage done by a recession. Delay is costly," said council member Joseph Persky, a professor of economics at the University of Illinois at Chicago. The governor established the council of economists and business and public policy professionals in 2003 to advise him on economic growth issues.
How soon Illinois can alter its plans remains unclear. The state has lacked any new capital spending in recent years and not had a major infrastructure program since the $12 billion Illinois Works capital plan in 1999. However, mounting support this year gave many lawmakers, local governments, school districts, and other proponents hope that one could pass.
It's not been an easy task, given the growing divisiveness among lawmakers and Blagojevich, even with the governor's own Democratic Party in charge of both of the General Assembly's chambers. He even enlisted two respected stalwarts of Illinois politics - former U.S. House Speaker Dennis Hastert, a Republican, and former congressman Glenn Poshard, a Democrat, to craft and promote a plan.
The governor wanted a $34 billion program that relied on $7 billion from the lottery lease, $800 million from the issuance of new casino licenses and expanded gaming positions, $7.8 billion of new borrowing, and local and federal matching dollars. Federal lawmakers have warned the state that it risks losing up to $9 billion in federal matching dollars without new authorized capital spending. The plan was later scaled down to $25 billion.
The gaming expansion died amid legislative opposition, and initially the House - led by Blagojevich's nemesis, Speaker Michael Madigan, a Chicago Democrat - rejected the lottery lease. After months of bickering, the House passed legislation that would allow the state to put the lottery out to bid for private operators for a term of at least 50 years and no more than 60 if at least $10 billion could be raised. The valuation came from a study submitted to the state several years ago by Goldman, Sachs & Co.
Of the proceeds, $7 billion would go to fund a capital budget that has not yet been approved. The legislation called for any transaction to be approved by the state comptroller and treasurer, and capped fees for financial firms that work on the deal.
Illinois would retain a 20% ownership stake in the lottery. The state's ongoing annual profits, along with interest from an endowment set up with the remaining $3 billion from the anticipated $10 billion lease payment, would go to fund education-related spending that is now covered by the $600 million in profits generated annually by the lottery. The Senate has passed its own version and was expected to work with the House on a version agreeable to both chambers when it convened later this month for an annual veto session.
The Blagojevich administration has said it was aware of the federal law governing state lotteries when it drafted the privatization legislation, and officials contend the state's proposal is still viable as the opinion remains under review.
Others agree that the plan remains viable, but believe it will result in much leaner, more conservative capital plan.
"This opinion provides a road map for how the House and Senate should reconcile the two versions," said Sen. Jeff Schoenberg, D-Evanston, a co-sponsor of the lottery lease legislation. "The opinion, coupled with the sharp decline in the capital markets, means that lawmakers will need to curb their appetite for capital spending."
Schoenberg said the pending sale of the state's 10th casino license and other possible revenues should also be considered to help fund an infrastructure program.
Madigan spokesman Steve Brown said his office was still reviewing the opinion, but added that it clearly raises concerns over funding levels. "It certainly creates a new predicament. It's back to the drawing board," he said.
Both Brown and Schoenberg now believe it's unlikely any resolution will come in the veto session slated for later this month, leaving the issue for lawmakers to take up in next year's session when the General Assembly faces a likely operating budget deficit amid growing personnel and pension costs and faltering revenue collections.
The governor's administration is also the subject of an ongoing federal corruption probe known as Operation Board Games, and any developments in that case could complicate the next session.
The 13-page lottery opinion was issued Oct. 16 by the Justice Department at the request of Indiana and New Jersey, which were considering their own versions of lottery leases. California, New York, Puerto Rico, Texas, and Vermont have also floated plans although no state has inked such a deal.
The opinion said a state must "exercise actual control over all significant business decisions made by the lottery enterprise" in order to comply with the federal lottery statute exemption. It can be found at www.usdoj.gov/olc/2008/state-conducted-lotteries101608.pdf.
U.S. law currently prohibits the promotion and advertising of lotteries in interstate commerce with an exemption for those that are operated by a state. In addition to maintaining control over business decisions, a state must retain a majority share in the profits and losses of a lottery, as well as the rights to the trademarks and other essential assets of the state lottery, the ruling stated.
While federal law does allow a state to contract with a private firm to "provide goods and services necessary to enable the state to conduct its lottery, including management services," such a company cannot receive more than a minimal interest in the profits and losses of a state-run lottery.
Indiana Gov. Mitch Daniels said he would drop his plan after receiving the opinion. Indiana instead will likely consider issuing bonds backed by lottery revenue as an alternative way of generating upfront cash from a state-run lottery. California is considering a similar plan.
Under Daniels' lottery lease plan, which he revived in August after an earlier proposal died in 2007 from lack of political support, the state would have entered into a 30-year lease of the lottery to finance a Hoosier College Promise program offering scholarships for middle class high-school graduates in Indiana. The governor estimated a private company would pay the state at least $1 billion in upfront cash as well as $200 million a year in payments - the amount that the lottery currently generates in annual profits.
In California, Gov. Arnold Schwarzenegger has in the past discussed the possibility of leasing the state lottery, but the plan never gained ground. Instead, his administration plans a ballot measure next year that would authorize California to issue bonds backed by revenues from the state-owned lottery.
Caitlin Devitt and Rich Saskal contributed to this story.
