Facing a $4.3 billion budget gap, New York Gov. Eliot Spitzer yesterday proposed monetizing the lottery to create a $4 billion endowment for higher education initiatives and creating a $1 billion fund to finance upstate infrastructure and economic development.

Delivering his state of the state speech in Albany, the Democratic governor also proposed capping school district property taxes and creating a $400 million fund to finance workforce housing.

More details on his proposals are expected when he releases his fiscal 2009 budget on Jan. 22.

State budget director Laura Anglin said the state will be putting out a request for proposals for financial advisers to look at potentially leasing the lottery.

“Obviously that’s one of the options that many states are considering,” she said. But no specific proposal yet exists and it would have to be worked out with the Legislature, she said. The potential privatization is expected to generate $200 million annually in operating funds for the endowment and would pay for hiring 2,000 new full-time faculty members for the State University of New York and City University of New York systems, including 250 “eminent scholars” who would draw research grants and raise campuses’ stature, Spitzer said.

“We should unlock some of the value of the New York state lottery,” Spitzer said. “Either by taking in private investment or looking at other financing alternatives.”

Although he was vague on details about the potential lottery privatization, Spitzer said the state would still regulate all lottery games and that the lottery would continue to generate more than $2 billion annually for K to 12 education.

The proposal could have a tough road ahead, said Albany Law School professor Bennett Liebman.

“There are state constitutional hurdles,” he said. “The New York state constitution requires that the state operate the lottery. Any sort of allocation to private industry would have to retain some measure of governmental control over the lottery.”

Leasing the lottery, as Illinois proposed, probably wouldn’t work because of the constitutional requirement, he said. Other concerns would be whether the Legislature would want to give up control over the issue of gaming and how viable the privatization would be, he said.

To give Upstate New York’s economy a shot in the arm, Spitzer proposed a $1 billion “Upstate Revitalization Fund” to help finance business, infrastructure, and agribusiness projects.

Spitzer did not say how the fund would be financed, but said more information would become available next week when he delivers the first state of upstate address. Warner Johnston, spokesman for the Empire State Development Corp., which has been Spitzer’s main vehicle for economic development Upstate, said he did not know whether the ESDC would be involved with the fund.

Spitzer’s property tax proposal would create a commission, headed by Nassau County executive Tom Suozzi, to come up with recommendations for caps on school district property taxes. The commission would be directed to study the issues, including looking at unfunded mandates on school districts and municipalities, and look at ways to make the property tax system “fairer” to middle class taxpayers.

“A tax cap is a blunt instrument, but it forces hard choices and discipline when nothing else has worked,” Spitzer said. “When combined with real reform of unfunded mandates and a blueprint for providing a high quality education at a more affordable cost, a cap will allow us to invest wisely in our schools while achieving the goal of controlling property taxes.”

One New York bond counsel, speaking before Spitzer delivered his speech, said that a cap on property taxes could end up in the courts.

“The property tax is exclusively a local tax, and in New York, the state can’t get its hands on it,” the attorney said. “Unless you amended the state constitution, I don’t know how you put a cap at the state level on local property tax.”

If the state can cap property taxes “then what does full faith and credit mean?” the attorney said.

From a credit perspective, the first concern about a cap would be whether it impacted debt service on outstanding bonds and then what impact would be on operations, said Standard & Poor’s director Robin Prunty.

“We have said in our criteria that anything that restricts a local government’s ability to raise revenue can create budget challenges,” Prunty said. “Many work around it, and it doesn’t necessarily create a credit impact, but it really depends on how restrictive the individual limitation is and what other revenue sources are available to the government.”

“I don’t know how it could be done without exempting debt service,” she said.

Spitzer also proposed creating a $400 million “Housing Opportunity Fund” to finance housing for teachers and police. The fund would be run by the State of New York Mortgage Agency, SONYMA spokesman Philip Lentz said. Lentz said he did not know whether the fund would be financed through bond proceeds but that he expected details to emerge in the budget.

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