Should Pennsylvania Be in the Lottery Business?

When gambling's for grandma, privatization could be a good thing.

Last week, like millions of other people across the country, I plunked down my dollar for a six-digit shot at the American dream. Did I really think my single Mega-Millions ticket—its numbers spat out at random by the computer at my corner bodega—really had a chance of hitting? I’d like to tell you that I’m smarter than that—that my critical insight and innate cynicism won out over the hype. But I’d be lying. If I didn’t think there was some chance of winning, even an inordinately remote one, I wouldn’t have bought the ticket in the first place, nor endured the gentle razzing I received for doing so from my wife, who is, apparently, more of a skeptic than me.

She’s right to be dubious. We’ve all heard the comparisons: You know, how you’re more likely to get hit by lightning, get murdered on your way home from church or get audited by the IRS than hit a winning lottery number. In more quantifiable terms, in multi-state lotteries, such as Mega-Millions and Powerball, the chances of winning average somewhere around 120 million to one; in the case of last Friday’s drawing, it was closer to 176 million to one. In other words, it’s a loooooooooong shot.

I can count on one hand the number of times I’ve played the lottery in my life, and I wouldn’t need all five fingers. But even absent my participation, lotteries are big business in the 43 states (plus the District of Columbia, Puerto Rico, and U.S.Virgin Islands) that host them, providing vital financial support for many of the same public services that have been hacked to pieces since the GOP sweep of state legislatures in 2010.

An average of 35 percent of lottery proceeds, which amount to hundreds of millions of dollars each year, are diverted into state coffers, mostly to fund social services. In more than half of lottery states, proceeds from the games go to public education. According to the Washington Post, sales of Mega-Millions tickets for last week’s drawing generated nearly $22 million for K-12 public schools in Virginia alone; another $9.3 million went to schools in Tennessee, and $2.9 million went to Oklahoma’s education fund. You can’t argue with that math.

Pennsylvania, meanwhile, distinguishes itself as the only state to use revenue generated by its lottery games to fund senior citizen programs (profits from slot machines at the commonwealth’s 11 casinos are mainly used to lower school property taxes, although there is some indication that hasn’t been working out too well).

According to the Department of Revenue, the Pennsylvania Lottery provides about 75 percent of the funding for the state Department of Aging. For the past three years, annual proceeds have exceeded $3 billion—about 60 percent of which is paid out in prizes; most of what’s left over goes to a handful of programs for the elderly including free and reduced-fare transit, rent and property tax rebates, prescription drug assistance, and hundreds of full- and part-time senior community centers (like the one in South Philadelphia where my grandmom spends much of every weekday).

Since 1972, when its first game went on sale, the Pennsylvania Lottery has contributed more than $21.5 billion to support seniors through these services. But state officials say the rapid growth of the state’s senior population means it will need to milk even more out of its lottery to keep those programs funded. And the Corbett administration thinks it has just the plan to do so.

You guessed it: Privatization.

On Monday, the Governor proposed turning day-to-day management of the Pennsylvania Lottery, which is currently run by the Department of Revenue and employs 233 state workers, over to a private entity. Specifically, the state issued a so-called “Request for Qualifications” seeking competitive bids and has reportedly hired a Chicago investment bank to help manage the process. The goal, according to Corbett, is to tap the private sector for “new ideas to maximize the Lottery’s performance and increase revenues.”

In reality the state’s plan is only a quasi-privatization. Under federal law, states are prohibited from handing full control of their lottery operations over to the private sector. In 2008, the Justice Department issued a memorandum in response to a proposal by Indiana to fully privatize its lottery. It concluded:

“[T]he statutory exemption for lotteries … requires that the State exercise actual control over all significant business decisions made by the lottery enterprise and retain all but a de minimis share of the equity interest in the profits and losses of the business, as well as the rights to the trademarks and other unique intellectual property or essential assets of the State’s lottery.”

As such, under the Corbett plan a private management firm would be responsible for the lottery’s operations, but the commonwealth would still conduct it and retain full rights to control, inspect and audit the lottery. Should the management firm fail to meet current revenue standards, the contract terms would require that it cover any shortfall to financial returns, the governor said.

Choosing what government services are suitable for privatization and which are not can be a delicate operation and some conservatives have revealed a willingness to blunder into the process based on ideological goals rather than civic ones. In this case, however—and under the terms presented by the governor—the lottery offers the perfect opportunity to simultaneously trim government and boost private investment in the state.

If you read this column regularly you know that I reject efforts to privatize vital government services as shortsighted and potentially dangerous. But no one would argue the lottery is a vital government service, even if its proceeds are used to support vital programs. Unlike health care, for instance—where the benefit to consumers comes from the service itself—the civic benefit of the lottery comes not from the service, but from the proceeds it generates. If a private company can maximize those proceeds—and funnel more money to South Philadelphia so my grandmom can have a decent lunch every day, I say have at it. As it happens, profit motive is uniquely suited for finding efficient ways to make money; it’s just not so suited to determine who should get a new liver or where a new road should go.

Which leads us to the question of whether it is ethical for the government to be involved in lotteries at all. It’s a fair inquiry. In selling lottery tickets the state is peddling a product that causes problems for some vulnerable people in order to generate profits to help another group of vulnerable people—some of whom, no doubt, fall into the first group as well (data shows senior citizens play the lottery in disproportionately high numbers). If obsessive gambling is a potentially dangerous addiction—and the American Psychiatric Association says it is—then how is a government-sponsored lottery ticket any different than a government-sponsored cigarette?

I guess it depends on the scope of its impact. Unfortunately, in the U.S. there is little research on the problem of lottery addiction (although China claims to have seven million lottery addicts). But we do have some insight into gambling addiction. According to the National Council on Problem Gambling, less than three percent of the gambling public reaches addictive levels. That might not sound like much, but when you consider that nearly 60 percent of Americans play the lottery—a third of them regularly—the numbers do add up. And yet it amounts to a tiny proportion of the millions of people who enjoy gaming.

Given the anti-tax sentiment running strong through American politics today and a clear willingness among state legislatures to slash funding for public education, welfare services, aid to the elderly, and other essential programs, I can’t help but worry what the public safety net would look like without all that lottery revenue in the mix. I imagine it would have a lot of holes. For better or worse, until things change, lotteries  may be our best hope for keeping our schools adequately funded and our seniors cared for.