February 07, 2007
Would you buy that?

Now that I've seen the plan to sell the Lottery, I just have one question: What in the world are they thinking?

Perry centered his State of the State address on the idea of selling the state lottery for at least $14 billion. The proceeds from the sale would be divided into three trusts: $8.3 billion for public education and $3 billion for cancer research.

The remaining $2.7 billion would be used with federal money in a new health insurance program that could cover as many as 600,000 currently uninsured Texas adults, according to Perry staffers.

The lump sum from the lottery sale would be invested, not spent, generating a yearly return of some $1.3 billion, about $300 million more than Texas gets from owning the state lottery, according to estimates from Perry's office.


Perry's plan assumes that the state will find a buyer willing to fork over $14 billion and that the state's investments will yield a 9 percent annual return.

"If that's true, I'd like to know what they plan to invest in," said Rep. Mike Villarreal, D-San Antonio. "Every investment has a pattern of going up and down. What happens during those years when we're not earning that rate of return?"

Never mind what plan Perry would invest that $14 billion in. What I want to know is why the potential buyer of the Lottery wouldn't just take the $14 billion and invest it the same way. I mean, if the Perry Investment Plan would generate $1.3 billion annual return, while the Lottery yields only $1 billion, what rational actor would choose the latter? Am I missing something here?

Forget the details. Either the money from the Lottery sale can generate more revenue than the Lottery itself, in which case no one will want to buy it, or it can't, in which case we shouldn't want to sell it. The only way that a sale makes sense is if the cash we got for it was slated for a capital investment - say, building a boatload of new schools - for which the money could not otherwise be raised. That's not the case here.

OK, I suppose that the putative Lottery buyer might think they can run it better and improve sales to the point that it can out-earn the Perry Investment Plan. But if that's really the case, why not just let them run it, and split whatever they can earn above the current $1 billion per year? Everyone benefits, at a much lower risk, and the state retains a valuable asset.

I mean, seriously. Am I missing something here? This isn't the real plan, right? Joke's over, fellas. Time to come clean.

UPDATE: McBlogger breaks out the financial terms and comes to the same basic conclusion.

Posted by Charles Kuffner on February 07, 2007 to Jackpot! | TrackBack