Capital plan passes both chambers

By Jamey Dunn and Hilary Russell
Photograph by Hilary Russell


Right: The Illinois House approved a revenue package by a vote of 86-30-1, with opposition mostly objecting to new gaming sources.

The House tonight approved a major capital construction program, wrapping up one of the three major issues that lawmakers seek to tackle before session adjourns at the end of the month. The next step for the bill is approval from Gov. Pat Quinn, but whether that will happen quickly and when projects would begin is still up in the air.

The $26 billion plan will be funded by tax, fee and fine increases. The state will contribute about $11.5 billion, which will leverage federal and local funds. An expansion of lottery ticket sales and legalizing video gaming in bars, restaurants and truck stops will generate revenue for the state’s contribution.

However, House Minority Leader Tom Cross said he does not know exactly when construction would start. “Maybe summer, early fall. But I think even if you don’t have specific shovels in the ground, you’ve got engineers and architects putting plans together,” he said after the program won House approval. “We’ve got some good movement in that mini-capital plan, so there’s some activity out there. Would we all love to see it all tomorrow? Yeah, but it’s not going to happen.”

Some of the proposed revenue sources would not immediately bring in money. Video gaming would require implementing a complicated oversight process. Many establishments already have video poker machines, and some illegally pay out to winners. If the legislation becomes law, the payouts would have to be documented and regulated. Existing machines would have to be replaced or retrofitted to meet monitoring standards spelled out in the legislation. Proponents claim that the new regulation could weed out organized crime that has been perceived to be associated with illegal video poker.

Leasing the Illinois Lottery to a private entity is contingent on approval from the U.S. Department of Justice, and the state has no control over how soon, if ever, that will come. Selling lottery tickets online is an unprecedented move. If approved, getting the operation up and running could take awhile.

Legalizing video gaming and the proposed changes to the lottery kept the plan from getting unanimous support. Cross said it was a difficult vote for some members of the GOP caucus. “It’s going to be difficult, and it’s going to have a little pain in it. And, there are people that didn’t like it,” he said.

Some Democrats didn’t like it, either. The majority of “no” votes among Democrats came from suburban Chicago lawmakers. Many echoed Quinn’s statement yesterday that the state’s operating budget, which funds government operations, health care, education and social services, should have taken priority over a construction plan.

Rep. John Fritchey, a Chicago Democrat and the only lawmaker to vote “present” on the revenue sources, said he was hesitant to approve what he considered a gaming expansion and the privatization of the lottery. He added that while the legislature found money to build new schools, lawmakers haven’t yet figured out how to pay for the teachers who would work in those schools.

Legislators also expressed concern that Quinn might not sign the capital plan into law until the General Assembly sends an operating budget to his desk. He has 60 days to act before the capital program automatically becomes law. Cross said that Quinn had told him he would sign the bill, but he worries that Quinn could delay the signing.

Regardless, lawmakers expressed relief that both chambers finally approved a long-awaited infrastructure program after consecutive years of false starts.

Rep. Lou Lang, a Skokie Democrat, said: “The state of Illinois has needed an infrastructure bill for a very long time. We need to put people to work, we need to fix roads, bridges and schools and water mains, and I believe this is an economic stimulus package done by the state of Illinois. And it was critical that it passed.”

Now the legislature can turn its focus to the operating budget and government reforms. While some procurement and employee ethics reforms advanced to the Senate today, the Senate also could begin debate about the governor’s Illinois Reform Commission’s proposals tomorrow.

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So you want to lease a lottery....

Well I dusted off the spreadsheet I did when this first came up and I have made it available here...

Again I am not a finance professional and it's been a while since I had finance in grad school so I may be off on some of my numbers or calculations...

Turns out my estimate for FY 2007 earnings were only off by 9 million on sales of over two billion (not bad if I say so myself), for the annouced 2008 earnings I am off by 50 million, the had a 2.8% revenue growth I estimated 3%. If you want the spreadsheet, or collaborate on it with via Google spreadsheets, send me an e-mail, I will also be willing to send you the actual spreadsheet if you send an e-mail the highlights however.

Using a annual growth rate of 5% and a 3% inflation rate, the NPV value (how much you would pay today to get the cash flows over time) is between 24 and 25 billion dollars (depending on which net present value formula you use) for about a 25 year lease.

It does bring up some interesting numbers near the end however, by 2033 lottery revenues show 7.5 Billion dollars, assuming that Illinois has about 13 million people today that if population remains flat, every man, woman and child in Illinois would be spending abut $577 a year in lottery tickets.

So 25 Billion, that is the max (using the numbers I have and set) that you would expect anyone to pay for the lottery lease

The posts from 2006 are here and here.

Again there are a ton of risks to anyone who leases this thing. So I doubt you get anything near 24 billion, also the contract is going to have some conditions including....

for a list of some of those risks go to my post here...

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Friday follow-up

A few loose ends that we recently wrote about have been tied up today, while few more are about to reopen next week. The Illinois House returns to Springfield Wednesday and Thursday to debate funding for a statewide construction plan and to reverse some of the governor's recent actions.

AFSCME: It’s fair
First, a lot of rallies, meetings and political undertones potentially came to rest Friday as about 37,000 state employees have a new, agreed-upon contract with their top employer, Gov. Rod Blagojevich’s administration. Members of the American Federation of State, County and Municipal Employees Council 31 vocally opposed increases in their health care costs that they say the administration sought. Months of negotiations led the union to request a mediator to bring the two sides closer together.

The result is a four-year contract that gives members a 15.25 percent wage increase during the life of the contract, and retired employees will retain the pension and health benefits they received under the former contract. However, employees are going to pay more for their health insurance premiums, co-payments and deductibles. Cohen said monthly premiums will increase by $12 twice during the next four years. “The state was asking for huge amounts, and we ended up are what we feel are modest amounts,” Cohen said, later adding: “Our members feel it was fair. When they looked at that contract, it wasn’t everything they wanted, but it was fair.”

He said they didn’t get relief from mandatory overtime, which they expect to intensify as more workers are laid off and the remaining employees do “more with less,” an all too familiar phrase.

The governor’s office also said in a statement that the contract was “fair" for both taxpayers and state workers. "Both sides spent months in negotiations, and this contract is the result of that tireless work.”

AFSCME: It’s unfair
Council 31, however, still disagrees with the administration about a separate issue: closing a once troubled facility for people with developmental disabilities. William A. Howe Developmental Center and the Tinley Park Mental Health Center in Chicago's south suburbs were decertified by the federal government for reports of neglect and other deficiencies. The lack of federal certification means the state no longer receives federal money to operate the facilities. But the Illinois Department of Human Services continued to operate and fund the centers without a federal match. We wrote about the centers, as well as some new plans for caring for people with disabilities, in the June Illinois Issues magazine.

AFSCME opposes shuttering the center because it would leave about 800 employees without their state jobs and benefits. About 600 are AFSCME members, said John Cameron, Council 31 spokesman. Some families also opposed the closing because they fear for the continuity of care for their loved ones with few alternatives. The administration announced that it planned to move residents to other state institutions or to community-based services. Yet, Cameron said, this affects people with high needs of services, and the union questions whether the state has enough capacity to support community-based services that already are under-funded and have long waiting lists.

The Illinois Council on Developmental Disabilities said about 15,000 individuals are on a waiting list for such services. However, the council said shutting one door opens another. Instead of placing people with disabilities in more institutions, advocates look to community-based services as a way to improve what they describe as an outdated system. Read more in the organization’s report, “Blueprint for system redesign in Illinois.”

Home for the House days
State Rep. Jim Watson, a Jacksonville Republican and staff sergeant in the U.S. Marine Corps, flew home from Camp Pendleton, Calif., today after serving more than six months in Iraq. Watch Illinois Issues magazine print edition to read more about the work he did to help one province establish its first form of representative government, which the U.S. military just handed over to the Anbar Provincial Council on Labor Day.

Watson arrives home just in time for the Illinois House to reconvene in a special session to discuss funding a capital construction program by leasing the Illinois Lottery to private investors.

But even if the House approves a lottery deal — with some modifications to the governor’s original proposal — it still has to go to the Senate, which isn’t scheduled to come back to Springfield before November. And even if the Senate approved a measure to let the governor lease the lottery, then it still would take months to figure out the amount of money it would generate and the amount of money that the state would have to borrow. Only then would the House draft a spending plan for that money, according to Rep. Gary Hannig, a Litchfield Democrat and deputy majority leader.

But voting on a lottery plan is a first step in that process. Expect the House to include such “safeguards" as requiring the state treasurer and comptroller to sign off on the lottery deal to ensure that it’s a good deal for taxpayers. Hannig also said an ethics portion would “ensure that there’s no temptation to engage in any kind of pay-to-play antics,” and they could limit the amount consultants and lawyers could make from the deal. “Hopefully we can pass this bill next week and send it to the Senate,” Hannig said. “And it isn’t that much different from what they have already passed.”

We’ll see about that.

The House also is expected consider some of the governor’s amendatory vetoes, including the unanimously approved ethics legislation that Blagojevich expanded. And House members could try to approve restoring some of the money the governor cut that resulted in hundreds of layoffs, closed state parks and closed state historic sites. But it would restore some, not all, of the cuts, Hannig said.

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Throw it into reverse

The Civic Federation lacks confidence in state leaders to rake in new cash and spend it wisely, which is partially why it withdrew its support of an income tax increase proposed last year.

The federation is a nonpartisan research body consisting of powerful corporate leaders in the Chicago area. It released a report today, reversing its position on a state income tax increase to generate new money to help pay down old and compounding debt.

“Last year, we supported a reasonable income tax increase if, and only if, it was tied to reform,” said Laurence Msall, president of the Civic Federation. He also serves on the Illinois Issues Advisory Board. “And some of those reforms would be very similar to what the Illinois General Assembly and the governor demanded of the Chicago Transit Authority, in terms of what they had to do before the state was support additional funding for them.”

Part of the Chicago Transit Authority deal negotiated in January included saving taxpayer dollars by increasing employee contribution rates, increasing the retirement age to 65 and shaving down health care benefits for future employees.

Last year, Msall said, the committee offered a modest income tax increase as an alternative to the Gov. Rod Blagojevich’s failed gross receipts tax on businesses. The recommendations started with momentum at the beginning of the year but deflated under a whole host of budget issues lasting throughout the year. And the legislature and the governor haven't shown signs of banding together behind reform any time soon.

“We have seen no evidence that there has been any serious effort, unlike three years ago when the governor stood up in a state budget address and said: ‘We have a big problem. We’re going to have to reform our pension benefit system,’” Msall said. “The General Assembly adopted only the most modest of those recommendations and then proceeded to take pension holidays, making the problem even worse.”

FYI: A special panel created by statute issued recommendations in 2005. You can read them here. Read more about the legislature’s pension holidays in Illinois Issues magazine here and in a state report here.

The Civic Federation's report says the governor’s proposed budget fails again to make “reasonable” payments to the pension system for public employees. As a result, the state’s compounding debt includes $44 billion in unfunded pension liabilities and another $24 billion in health care liabilities for retired state employees. Fun fact: That's about half of the state's entire budget.

The group also said it can’t support the governor’s proposed infrastructure program, which depends on privatizing the Illinois Lottery for an immediate influx of cash. The Civic Federation report said the proposal lacks a detailed plan for spending the money.

“There is no comprehensive improvement plan. There is a series of projects and lists,” Msall said. “You owe it to the public — and the General Assembly should demand — that they know what priorities are before they approve the extraordinary borrowing against the future revenue stream, which is what the lottery is.”

The governor’s budget office says the Illinois Board of Higher Education is responsible for evaluating and prioritizing its capital projects that would be included in a statewide infrastructure plan, and the state depends on a statutory formula for distributing capital funds for school construction projects. The Illinois Department of Transportation also has an extensive list of roads and bridges in need of repair, as well as a list for new roads and projects.

The Civic Federation’s overall message from last year still applies, however. The state should reduce, not increase, operating costs and new spending, which is why the group supports the governor’s proposals to cut most state agency budgets by 3 percent and to consolidate state agency functions to reduce administrative costs.

See “Shaky Business” in Illinois Issues, May 2007, to read about the business community’s support for a state income tax increase last year.

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Many questions, few answers

BY BETHANY CARSON AND DEANESE WILLIAMS-HARRIS
Even with no testimony from Gov. Rod Blagojevich and with few details provided on privatizing the state lottery, Illinois lawmakers could vote Friday on whether to give the governor authorization to do two things: 1) lease the lottery to a private firm for at least $10 billion and 2) issue $16 billion in bonds. Both are tactics to reduce state debt in the public employee pension systems.

Hours of testimony in a special House committee and in a separate Senate committee provided few answers for some of the biggest questions. For instance, many asked how much revenue the state would share with a private operator, as well as how the state would compensate for revenue lost by leasing the state asset. Lawmakers also expressed skepticism because only a handful of states are considering privatizing their lotteries, but none have actually done it.

“Do we want to be first, or maybe we’d be better off second or third?” said Sen. Terry Link, a Waukegan Democrat, during the Senate committee.

Mark Florian, marketing director for Goldman, Sachs & Co., which is advising the governor’s office on the deal and stands to profit if the deal goes through, said the size of Illinois’ lottery makes this state a potential frontrunner. “People are going to stretch and stretch very, very hard [so] that there will be a premium, a trophy premium, to have access to this lottery system,” he told the committee. The Blagojevich Administration often cites estimated revenue at about $10 billion.

That’s exactly why some lawmakers questioned why the state would want to lease the lottery if it has so much potential for revenue growth, which would put more money into the state’s education system.

Some of the same questions came up during about 6 hours of questioning by a special committee of the entire House, in which the governor was invited to participate but declined. “I must confess that I believe you are more interested in playing games and taking solutions off the table than trying to find solutions to solve real problems,” he wrote in a letter to House Speaker Michael Madigan that was shared with legislators and the media. A series of rather snippy letters have been exchanged between the speaker and the governor this week, continuing the gridlock that led Blagojevich to convene a special session seven days a week until a full state budget comes to fruition.

“If the governor believes this is a waste of time, I think that’s pathetic,” said Rep. Jack Franks after the House committee. The Woodstock Democrat came up with the idea to invite the governor to the committee of the entire chamber and led Thursday’s hearing. “I think it’s cowardly for him not to have been here after calling the [special] session.”

At the end of the business day, the House moved three pieces of legislation, one proposing the lease of the Illinois Lottery, one proposing the issuance of pension bonds and one nonbinding resolution urging the General Assembly to resolve pension reform and debt before the legislative session adjourns for good in 2007.

Tom Johnson, president of the Taxpayers’ Federation of Illinois, said the administration was putting the cart before the horse because the lottery proposal comes up with a funding mechanism for state pension obligations before it addresses mounting pension liabilities. He said a better plan would evaluate the expense of the benefits offered as a way to cut costs. “The lottery is the taxpayers’ asset,” Johnson said. “The [pension obligation bond] debt will be the taxpayers’ debt.”

John Filan, chief operating officer, said with $41 billion in debt, “all solutions will be expensive, very expensive, and require major revenues.” When asked whether the governor’s initial gross receipts tax proposal was still on the table, Filan didn’t answer yes or no. He simply said the administration would consider other forms of business taxes, such as ending some corporate tax breaks.

The governor is not expected to appear before the House Friday, either.

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Why at least a bill about leasing the lottery is a good thing

So we are going to have a committee of the whole meeting to talk about selling the lottery or perhaps we will not.

I have to admit, the letters between Madigan and the Governor have been entertaining. However there is one thing I think Speaker Madigan needs to point out.

We can't really get an idea of what the lottery is worth (part of the governor's solution to the pension issue) without knowing what the bill authorizing the lease looks like.

Why...
I have blogged a bit on this in the past. In May of 2006 (no, we haven't been talking this concept to death at all) I calculated the NPV (what you would pay today to get the next 30 years of cash flow of the lottery) of the lottery at about $24 billion today. The big problem is the number of unknowns in the calculations when taking a non-guaranteed cash flow and trying to figure out how much it is worth. If you lease the lottery you don't know if folks are still going to want to play the lottery in 30 years.

I have blogged about some of the issues with valuing the lottery in a post here.


The big advantage is having some sort of 'lease bill' out there is you can then start figuring out what (if any) discount you need to calculate to cover risks such as local taxation of lottery sales (IE the City of Chicago starts taxing lottery sales), changes in the multi-state compact (the Big Game), risks of the lottery being ruled illegal, if a government entity within the state could start it's own lottery (The city of Aurora presents 'City of Lights Ball'), regulatory issues about marketing the games, etc. A bill starts answering these questions, because I don't see how you value a lottery lease until you get some answers to these questions.

Leasing a lottery isn't like leasing a a tollway. You know the lead times for new road creation and know the odds (or can calculate them) of some event or events that can impact your revenues. Gas costing $10 a gallon, people using personal jet packs, etc. The problem with the lottery is there is lots of stuff that can hurt you financially that can occur without any real warning or any redress for the leaseholder if it happens.

Heck worse case with a tollway lease where people stop driving you can rent the space out...

The big advantage of a lottery lease bill is you can start eliminating some of the variables that reduce the value and can start evaluating the others.

For more on some of the issues on leasing the lottery do a search over at OneMan's Thoughts
or look here for some information of the value or here for some of the risks a leasholder might face.

OneMan

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