The Providence Journal / Bill Murphy

PROVIDENCE

Wall Street bankers have come to Rhode Island in recent months with a proposed solution to Rhode Island’s budget mess: lease out the state Lottery.

One major investment bank pitched a $950-million lease; another suggested the Lottery could be worth $6.4 billion to private investors. And if that sounds good, how about leasing or selling the Pell Bridge for $280 million, and then, perhaps, the Rhode Island Convention Center, T.F. Green Airport, the state prison and the Rhode Island Public Transit Authority.

With millions of dollars in fees at stake, sales representatives from big-name investment houses — including The Carlyle Group, Goldman Sachs, UBS Investment Bank, Lazard Freres & Co., the Macquarie Group, Merrill Lynch and Lehman Brothers — have been in and out of Rhode Island since last spring with proposals to lease or sell to private investors a financial stake in all of these publicly owned assets.

Why do it? The most ambitious proposals promise “new funding” for education, road and bridge construction, affordable health insurance and energy-bill relief for low-income Rhode Islanders. Another selling point: “It gets Rhode Island out of the business of running a gambling enterprise and allows the state to focus its attention on core issues like the economy, education and health care.”

The reception from the governor, state treasurer and lawmakers so far has been cool.

Speaking for Governor Carcieri earlier this week, his spokesman, Jeff Neal, said: “Selling our future rights to lottery proceeds so we can avoid making tough budget decisions today would be a huge disservice to future generations of Rhode Islanders. That’s exactly what the General Assembly has done several times in recent years with tobacco money, and it has only made Rhode Island’s budget problems worse, not better.”

But most of this year’s tough budget decisions are still five to six months away. The prospect of a huge windfall to erase projected deficits of $151 million this year and $450 million next year could prove enticing to lawmakers facing ugly election-year alternatives, such as the disqualification of 10,000 children from the state’s subsidized health-insurance rolls or major cutbacks in public-employee pensions.

Government officials in at least a dozen states have considered proposals to privatize their lotteries, though none have done it as yet. And the Carcieri administration quietly solicited the proposals last spring.

THE IDEA is not new. In 1995, then-Connecticut Gov. John G. Rowland proposed selling a substantial interest in his state’s lottery to raise hundreds of millions of dollars. The idea has picked up steam since the long-term lease of toll roads in the Midwest produced eye-popping deals, such as the $1.8 billion consortium paid the city of Chicago to “lease” the 7.8-mile Chicago Skyway, and the $3.8-billion, 75-year lease of a northern Indiana toll road.

Vermont Gov. Jim Douglas recently proposed a long-term lease of his state’s lottery, in hopes of drawing $50 million up front to pay for school construction and property tax relief.

But after going down a similar path last year, Illinois lawmakers rejected Gov. Rod R. Blagojevich’s bid to lease their state’s lottery to a private operator for at least $10 billion to help pay down a huge pension bill. Said Rep. Barbara Flynn Currie, D-Chicago: “You don’t mortgage your future in order to pay your grocery bill.”

In Rhode Island, the two most evolved proposals so far are also among the most recent. And they couldn’t be further apart in what they say Rhode Island might glean from the long-term lease of the Lottery to private investors. One estimate was in the hundreds of millions; the other — which included rights to the state’s share of the video-slot revenue at Twin River and Newport Grand — hinted at a possible $6-billion payoff.

In the fiscal year that ended June 30, the Rhode Island Lottery generated $1.8 billion in sales, with $3.2 million in net profits paid to the state after the players, retailers, scratch ticket manufacturers, video-slot providers, the central operator — GTECH — and the owners of the state’s two slot parlors got their promised shares.

State-sponsored gambling is the state’s third-largest source of revenue. But after three decades of double-digit growth averaging 14.4 percent annually, the revenue dipped last year. And the Lottery’s growth picture is further clouded by what the investment bankers describe as: the “potential impact of the recently proposed Massachusetts casinos,” the “volatility of Powerball-driven ticket sales,” the possible legalization of Internet gambling, and the further risk that technology may, at some point, be unable “to prevent people from playing video poker on their cell phones or BlackBerries.”

Last month, two senior Goldman Sachs executives delivered a proposal to state Treasurer Frank Caprio. It opened with this declaration: “Public private partnerships for the Pell bridge or the Lottery could help address Rhode Island’s needs.”

With respect to the bridge, it said: “Tolls have not been raised since 1969…Could generate $280 million or more if the state is willing to make certain near-term rate adjustments.” Of the Lottery, it said: “State Lotteries, given their steady, growing cash flows and exclusive franchises are of significant interest to private operators/private equity. … Rhode Island’s traditional (non-VLT) Lottery could be worth $950 million to $1.25 billion.”

The company declined comment. But in its written proposal, it laid out a series of potential choices that ranged from the up-front sale of rights to future Lottery revenues, to what the company called a “long-term concession license agreement” in which the state got both an up-front payment and the “ability to retain some predefined percent of revenue or annuity payment.”

How much the state would derive from the transaction — and when — would depend on how quickly the state wanted the money; the “appetite of the state to retain risk” and whether the state retained full or partial control.

Lehman Brothers suggested a much bigger deal. Depending on how the deal was structured, the company told state officials: “We believe a 40-year lease of the Rhode Island Lottery would be worth $3.6 billion to $6.4 billion in a formal auction … depending on expansion of the Lottery and how quickly a private operator believes it could increase sales.”

And how might the Lottery increase sales? Among Lehman Brothers’ suggestions: place ads on the back of Lottery tickets (which has been allowed since 1994, but never drawn interest); use Lottery terminals to sell other tickets and services; “consider leasing the right to conduct a simulated Rhode Island Lottery on the Internet available only outside the U.S.” And finally: “The legality and option [of] selling Lottery tickets over the Internet, mobile phones and interactive television could also be explored.”

AT THIS POINT all of the proposals are speculative, but the more evolved among them are all premised on long-term leases of 40 to 50 years, and they all offer the state the same choice a big Powerball winner faces: How do you want your money? Up-front or spaced out over time? One Lehman Brothers scenario would pay the state $1.8 billion up-front and $323 million annually for 40 years.

Responding to anticipated arguments, Lehman Brothers said: “In other states, some have expressed concerns that an expansion of the lottery under private operation will lead to more gambling, and that a private operator may target vulnerable groups more aggressively.” But, “the Rhode Island Lottery already does its best to sell as many tickets as possible to anyone eligible to buy them,” and the lease agreement could require the new operator to submit marketing plans to the state for approval.

But the budget debate here has not yet begun in earnest. State law gives the governor another 10 days or so to present his 2008-09 spending and budget-cutting proposals to state lawmakers who traditionally do not vote on the big money bill until late June.

At this point, Caprio spokesman Xay Khamsyvoravong said the state treasurer is “not particularly interested,” because the “same people that were pushing the subprime stuff that we’ve seen recently explode … are pushing these public-private partnership. … Because of the bullet that we dodged, we are notably cautious about that stuff.”

A Carcieri spokesman confirmed that the governor’s staff had also “been approached about the concept of selling both the Rhode Island Lottery and the Pell Bridge.” Some proposals apparently came in unsolicited; others in response to a query from the budget office about opportunities for “public-private partnerships” that was appended to a recent request for proposals from underwriters.

When Carcieri was asked just before Christmas where he stood on selling or leasing major assets, he said: “Bridges, no; lottery, a question mark. … But I’m not open to selling anything to plug the budget.”

Spokesmen for the airport and the convention center said they could not comment on proposals they had not seen.

But state Lottery director Gerald Aubin said he is concerned about turning over the operation of the state’s $1.8-billion-a-year gambling business to private investors.

“The problem that I see and what I’ve heard from colleagues in the industry is the devil’s in the details. It’s fine and dandy. It has value. It makes so much money each year, but we don’t want to be regulated … or you have to ease up on the regulations.

“That’s the problem,” Aubin said. “When these jurisdictions got into the details of these proposals, it gets very murky, and you get caught in this quagmire of not being able to determine how to get out of it.”

State budget officer Rosemary Gallogly says she posed “a question about public-private partnerships” to the companies vying for a piece of the state’s underwriting business because “my theory is it is always better for the budget officer to be informed about things that people are doing in other states.”

“I don’t think any of these ideas made me walk out of the room saying this is the panacea and this is how we are going to solve the problem,” she said earlier this week.

And, “for the budget that we will be proposing in a couple of weeks, I don’t think there is much of chance that any of this would be included,” but “I think the governor is keeping an open mind on how we might look at some of this.”

With reports from State House Bureau writer Steve Peoples State Lottery

$950 million – $6.4 billionThe Pell Bridge

$280 millionThe Convention Center

No estimates … yet

kgregg@projo.com