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 California best ways of doing so would be to roll out “instant lottery” gaming machines that increasingly resemble the machines one might find in a casino.

“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 Brothers– reportedly have submitted proposals.

“This is obviously something we’re going to be discussing with the Legislature,” said Department 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 also likely would 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 likely would 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.

Contact Malcolm Maclachlan at

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