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Trading Lotto for Schools

DEC 19, 2006 7:21pm ET
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CHICAGO — Illinois is advancing plans to privatize its state lottery — the cornerstone of Gov. Rod Blagojevich’s proposed $10 billion education package — announcing yesterday that it has hired Chicago-based financial advisory firm Scott Balice Strategies LLC as project manager for the transaction.

Although legislative approval is still needed for any transaction, the state plans to soon follow up the selection of a project manager with the announcement of financial advisers and legal counsel, budget office spokeswoman Becky Carroll said. Though Carroll declined to comment on likely members of the team, sources said Goldman, Sachs & Co. is working on the deal as one of several financial advisers.

Goldman provided the state with a free valuation analysis that was used to craft the education plan in hopes that its work would give it an edge over other firms competing for the deal. The team is also expected to include minority-owned firms in the mix.

Officials decided the complexity of the transaction required a project manager.

“The project manager will be responsible for shepherding the transaction through the process and will have significant oversight in the management of the team we select,” Carroll said. “The nature and scope of this transaction is very unique.”

Carroll said John Filan, the state’s director of management and budget, selected Scott Balice, whose principal Lois Scott is one of several approved financial advisers to the state, to serve in that role because of the firm’s experience in both corporate and municipal finance and its experience as financial adviser to one of the unsuccessful bidders in Chicago’s $1.83 billion lease last year of the Skyway toll bridge. Lois Scott advocated several privatization proposals early in Blagojevich’s first term when she worked on the transition team.

The firm was among those that submitted a proposal by a July 28 deadline to work as financial adviser on the deal, a position that could have proved more lucrative than the $150,000 it will receive as project manager, according to Carroll.

In addition to its other roles with the state, Scott Balice recently was named a co-financial adviser to the Illinois Finance Authority. It lost out in its bid to work on the Illinois Student Assistance Commission’s proposed privatization of its assets over concerns that it shared office space with a firm employed by one of the potential bidders.

The budget office has spent the last several months mulling over proposals from various firms interested in advising Illinois on the lottery deal, which is aimed at generating new revenue to support an education spending package that includes $1.5 billion of new general obligation borrowing. The state has not yet decided whether it would lease the lottery through a competitive bid or hold an initial public offering, though the lease is the preferred option, Carroll said.

The Democrat governor unveiled the plan in May, prior to his successful November re-election, to mixed reviews, with some lawmakers and educators praising the potential infusion of new cash for education programs and construction, and others questioning the wisdom of selling off a state asset for what amounts to only a temporarily increase in funding.

Democratic Senate President Emil Jones Jr. of Chicago endorsed the plan, but Democratic House Speaker Michael Madigan, also of Chicago, has raised questions over how the value of the proposed sale was reached and the benefits and costs of the plan. Carroll said legislation would be introduced to the General Assembly sometime after it convenes early next year.

The plan as initially proposed would raise at least $10 billion from the lease of the lottery, which would provide $6 billion in education funding over the next four years. Of that total, about $4 billion would be diverted from the lease proceeds. The remaining $4 billion would be invested in a 25-year annuity that would generate an estimated $650 million annually for education funding until fiscal 2025. However, the plan does not provide a long-term revenue source to replace the $650 million currently generated by the lottery after the annuity is exhausted in 2025.

The plan also relies on investment proceeds generated by the remainder of the lottery proceeds, n income tax paid by the new operator of the lottery, and $1.5 billion from a mix of revenue growth and special fund budgetary transfers.

The initial proposal was based on the Goldman Sachs’ analysis. While the firm conducted the study in hopes of eventually securing the financial advisory contract, its selection last summer to run the books on a $300 million state GO sale so soon after it performed a free analysis of the lottery sale prompted charges of pay-to-play and cronyism from the governor’s Republican critics. Goldman served as financial adviser to Chicago on the privatization of the Skyway toll bridge last year and to Indiana on the lease of the Indiana Toll Road this year.

Indiana is also considering a lottery lease. Last week, Gov. Mitch Daniels announced that the state plans to launch a request for qualifications, possibly by the end of the year, for firms that would bid on the value of the lottery. Daniels would privatize the lottery for a fixed term to the winning bidder, which could include strategic or financial investors. The administration touted the plan as a way to fund higher education initiatives in the state, but several lawmakers have raised concerns over the proposal.

The state would hope to receive an upfront payment, estimated to be about $1 billion, from the winning bidder. Indiana would require annual payments of an estimated $200 million for the period of the lottery franchise agreement, and a percentage of the profits from the lottery. The state has brought in an average of $200 million annually in lottery proceeds. Daniels will need support from lawmakers to create legislation governing the franchise and the use of the proceeds.

Both Indiana and Illinois have said they would be the first to privatize a lottery although similar plans are in place in Greece and England. Chicago and Indiana have been in the forefront of the private-public partnership movement in the privatization of existing assets and are currently considering several other transactions. Chicago closed last week on a lease of its parking garages. The state of Illinois is in the early stages of considering a privatization of its tollway system and officials are working on the possible sale of the student loan portfolio.

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