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Summary of the Proposed Lease of the State Lottery

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I have had a number of inquiries about the details of the proposal to lease the State Lottery, so here we go with an explanation of SB2595, the version of the lottery lease proposal passed by the Illinois House of Representatives. This explanation covers only highlights of a complex 200-plus page piece of legislation. If you are a lawyer, policy wonk or masochist and wish to read the entire bill, you may do so here:
http://ilga.gov/legislation/95/SB/PDF/09500SB2595ham004.pdf
and here:
http://ilga.gov/legislation/95/SB/PDF/09500SB2595ham002.pdf

House version versus the Governor's proposal.

There are substantial differences between the House version, versus that proposed earlier by the Governor. Among them are the inclusion of strict ethics requirements, anti pay-to-play provisions, requirements for competitive bidding of the lease, caps on transaction fees, dedicated funds to guarantee use of the proceeds of the lease only as intended and not for political purposes, protections against exploitation of poor communities by the lessor, requirements for MBE/WBE/DBE participation, and protections for lottery employees.

Financial Overview.

Here are the basic financial terms and conditions for the proposed transaction:

• The State cannot sell or transfer the lottery

• The State will continue to receive 20% of gross lottery sales, less payouts

• The lease must be competitively bid

• A successful bid must be at least $10 billion

• The lease must be for at least 50 years and not more than 60 years

• $6 Billion must be paid to the State up front, and rest within two years

• Lessor must maintain minimum prize payouts of 55%

• State transaction costs are capped at $10 million

Other Key Operating Provisions.

• At least 37% of the value of all contracts issued by the concessionaire must go to businesses owned by minorities (25%), women (10%) and disabilities (2%)

• In zip codes with poverty rates at least 3% higher than the State average, the concessionaire cannot increase the number of lottery retailers by more than 10%

• All ticket sales agents must meet statutory requirements

• The concessionaire cannot use advertising practices that target, with the intent to exploit, specific groups or economic classes

• The concessionaire will continue to offer special games (e.g. breast cancer, HIV/AIDS) and will offer other special games approved by the General Assembly

• The concessionaire may not offer games not authorized under current law (e.g. keno, internet gaming) without statutory approval

Use of Lease Proceeds

• $3 Billion of the initial $6 Billion payment will be deposited into the Illinois Education Trust Fund

• The State's 20% ongoing share of lottery proceeds will be deposited into the Common School Fund. These ongoing proceeds, in combination with principal and interest from the Illinois Education Trust Fund, will be used to hold education funding harmless at $600 Million per year

• The next $7 Billion from the lottery lease will be deposited into the GROW Illinois Fund to be used for a State capital program

• The next $1 Billion will be deposited into the Illinois Education Trust Fund

• Any proceeds of the lottery lease above $11 billion will be deposited into the Pension Stabilization Fund

• The Secretary of State is authorized to make grants from the GROW Illinois Fund subject to appropriation

• Capital funds for roads will be expended in the proportions set out in HB5152 (essentially 45% to District 1, and 55% for Districts 2-9)

• A special fund is created to hold funds for disbursement to the RTA and other bodies

• A Capital Workforce Development Fund is created to incentivize capital project contractors to utilize minority, female and low income workers

Enforcement, Oversight and Ethics

• The bill reconstitutes the Illinois Gaming Board, and creates the Office of Gaming Enforcement to regulate gaming in the State, as well as the lottery

• The Gaming Board will no longer be part of the Department of Revenue, but an independent body

• The Gaming Board (5 members) and the Director of Gaming Enforcement will be nominated by the Governor from a slate of nominees provided by the Nominations Panel, and those nominations must be approved by the Senate

• The Nomination Panel shall consist of 2 former federal or state judges from Illinois, 2 former federal prosecutors from Illinois, 1 former sworn federal law enforcement officer, 2 persons with federal regulatory experience and 2 persons with interests in public interest advocacy

• The Nominations Panel will recommend 3 candidates for every Gaming Board position which the Governor must choose from

• Members of the Gaming Board itself must include 1 member with law enforcement experience, 1 member with CPA/audit knowledge of complex transactions, 1 member with private sector executive experience, and 2 former judges

• The Director Gaming Enforcement must have 10 years experience in law enforcement, preferably in the areas of regulating or enforcement in the gaming industry

• Members and the Director are subject to tight restrictions on ex-parte communications, revolving door, conflict of interest, and gift provisions

• Ethics provisions of HB 824 are included in this legislation

Given the size and complexity of this legislation this summary clearly only highlights some key points. For more detail, you can refer to the actual legislation listed above.

Some people have asked why there was not a specific list of capital projects included in the legislation. The answer is twofold: 1) Should this bill become law, it will be many months before bids for leasing the lottery, if any, are received, so we do not even know yet if anyone will bid $10 Billion (especially in the current economic climate), and 2) without knowing the size of the successful bid, if any, we do not know how much money will come in and what the size of a capital program will be. Listing projects now without knowing if funds will be available or how much money there will be only raises potentially false hopes.

Also, it must be pointed out that the education funding hold-harmless provisions over the 50-60 life of the lease are based on the current best assumptions. Changes in the economy over the decades could substantially change the assumptions on which these projections are based and either increase or decrease the availability of these monies.