Could lottery proposal run afoul of compacts?

Both budget and gaming experts are warning that Governor Arnold
Schwarzenegger’s lottery privatization proposal could run afoul of
Indian gaming compacts–and possibly cut into other state revenues.

The reason has largely to do with technology and its ability to blur
the lines between what were once distinct formats. Any private lottery
provider would want to expand revenues, critics say–and one of the
best ways of doing so would be to role out “instant lottery” gaming
machines that increasingly resemble the machines one might find in a

“Technology now allows you to play lottery games on devices that look
and feel and play like traditional slot machines,” said Howard
Dickstein, an attorney who represents the California Tribal Business
Alliance. “It becomes almost indistinguishable from a player’s point
of view.”

According to the Governor’s office, the lottery has been greatly
underperforming the lotteries in other states, and leasing it to a
private vendor would be a good way to increase revenues. Two
investment banking firms–Goldman Sachs and Lehman Bros.–have
reportedly submitted proposals.

“This is obviously something we’re going to be discussing with the
legislature,” said Dept. of Finance director H.D. Palmer.

“We certainly don’t want to go forward with this at the expense of Indian gaming,” he added.

However, a lot has changed since voters approved a lottery initiative
in 1984, said Dickstein. For one thing, since 1999, the state has
signed several compacts with California Indian tribes giving them
broad, exclusive rights to operate slot machines. The original lottery
act, Proposition 37, has numerous clauses about the machines and
technology the state lottery can use–including rules barring games
that look like slot machines.

Fred Klass, chief operating officer at Finance, said that the state has
many ways to expand gaming without running afoul of the gaming compacts.
For instance, it can offer gaming machines without offering instant payouts
like slot machines. Any new games would also likely avoid casino themes,
such as scratch cards that mimic a poker game.

“The proposal itself doesn’t run afoul of the compacts,” Dickstein
said. “But if the lottery act was amended to allow expanded gaming, it
would probably violate the exclusivity clauses of the compacts.”

Jean Ross, director of the California Budget Project, agrees there could be conflicts.

“Any provider who took it over would have to work within the confines
of the state compacts,” she said. “Unless they go back to the voters,
and my understanding is they’d like to avoid that.”

Ross said she also has another issue with the proposal: that it
doesn’t take into account how expanding one type of gaming may affect
other types of revenue. An expanded lottery would likely draw revenue
from two major sources, she said: other types of gaming, and other
types of personal spending. In other words, any revenue estimates
should look at how the expanded lottery would cut into state revenues
from other types of gaming and from overall sales tax revenue.

“At some point you have to consider, when do we saturate the market?”
Ross said.

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