Justice opinion a blow to Illinois' lottery lease plan

Doug Finke

A U.S. Department of Justice opinion casts doubt on the key source of funding for Illinois’ long-debated capital construction program by saying long-term leases of state lotteries violate federal law requiring state control of the lotteries.

According to the 13-page opinion issued last week, states must “exercise actual control over all significant business decisions made by the lottery enterprise” in order to comply with federal laws about lottery operations.

States are allowed to contract with private companies for equipment and services needed to operate a lottery and even some management functions, the opinion says, but the private companies cannot get more than a minimum amount of lottery revenue.

The opinion hamstrings Illinois’ plan to lease the lottery as a way for paying for a public works construction program. Illinois wants to lease 80 percent of the lottery to a private contractor, hoping to get at least $10 billion. Of that, about $7 billion would be used to pay for construction projects, with the rest guaranteeing school funding payments for the life of the lease.

Both the House and Senate have approved versions of the lease plan, but both chambers have not agreed on the same bill.

Katie Ridgway, spokeswoman for Gov. Rod Blagojevich, said Monday the administration is reviewing the Department of Justice opinion.

“We believe the facts and circumstances of the Illinois lottery lease proposal are different that the other states’ proposals,” said Ridgway, referring to the half-dozen states considering a lottery lease.

She did not respond with specifics about those differences. However, she said the administration was aware of federal lottery laws before it drafted the lease legislation.

Steve Brown, spokesman for House Speaker Michael Madigan, D-Chicago, said the House Democrat staff also is still reviewing the opinion.

“It appears to be another set of restrictions on a lease,” Brown said. “All of the people around this deal have all said the more restrictions, the less lucrative the lease would be.”

Both versions of the lottery lease bill that have passed require the state to get at least $10 billion from a private operator or the deal won’t go through.

“What this opinion is likely to do is significantly lower the amount of money that would come to the state,” said Sen. Jeff Schoenberg, D-Evanston. “That magic ($10 billion) number may have to be rethought.”

Getting less for a lottery lease means less money available for projects. Schoenberg, though, did not think the opinion prevents the state from leasing the lottery, as long as the deal is structured to comply with federal law that prohibits “the promotion and advertisement of lotteries in interstate commerce.” The exception is lotteries operated by state governments.

If a state doesn’t maintain control over all significant decisions of the lottery, the opinion concludes, the lottery would no longer be exempt from federal prohibitions.

The opinion was sought by Indiana and New Jersey, two other states considering leasing their lotteries. Indiana Gov. Mitch Daniels wanted to use lease money to pay for a college scholarship program. In the wake of the opinion, Daniels has dropped the idea of paying for the program with a lottery lease.

“Although the (opinion) is not binding, rather than challenging it in federal court, it seems wiser to look to other options we’ve been exploring to fund the (scholarship) proposal,” Daniels said in a written release.

Illinois lawmakers may be faced with the same option for a capital program if they can’t figure out a way to craft a lottery lease that meets federal restrictions. The other funding source for a construction program — greatly expanding gambling — was defeated last spring, and Madigan declared the issue dead.

“We would be back to square one if we take lottery off the table,” said Rep. Gary Hannig, D-Litchfield. “It would basically derail the whole program as proposed by the governor.”

Doug Finke can be reached at (217) 788-1527.