Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, October 27, 1995 TAG: 9510270045
SECTION: EDITORIAL PAGE: A-7 EDITION: METRO
SOURCE: PAUL GOLDMAN
DATELINE: LENGTH: Long
The money could bring all our schools up to Internet speed and guarantee every Virginia child the education necessary to compete in the new high-tech society. No child, even from the poorest school district, has to be left out in the cold.
This money is available without raising taxes and without borrowing a dime. Both the governor and the Democrats can get the credit. How? It's easy: Sell the lottery to private enterprise.
This is a pro-business, free-market solution to our educational needs. Virginia has the only state-owned, state-run lottery. In other states, a private management company has been hired to run the lottery, usually for a percentage of the ticket sales. Private companies have long claimed they could run a far more profitable Virginia Lottery.
Let's make private enterprise put up or shut up. On the business level, the Virginia Lottery is no different from any of the incredibly successful privately held businesses in the Roanoke Valley. Will the owners ever sell, to a bigger company or group of new investors or by issuing shares to the general public? Undoubtedly, they periodically check with an investment banker to determine their company's potential market value.
Gov. Allen and the General Assembly owe the same due diligence to Virginia's taxpayers. Our state leaders should immediately seek the advice of America's top deal-makers - Virginia has some of the best - to determine a market value for the lottery. Naturally, the final price, which the state would not be obligated to accept, will ultimately be determined by a competitive process between interested parties.
However, there is a useful benchmark for evaluating Virginia's most successful state-run business. According to a very respected investment guide, the current stock-market valuation of the average company is about 15 times current earnings. Unlike the lottery, these businesses pay taxes and other expenses not reflected on the lottery's operating statement. Adjusting for these variables, the Virginia Lottery would probably have a market value of around $3 billion if it were listed on the New York Stock Exchange or as an over-the-counter stock. Think of it: The state of Virginia, in a few short years, has developed a business worth billions.
Legislators have proposed selling the state-owned ABC business to private enterprise. Why not the lottery? On paper, it might bring 20 times more. Admittedly, the actual value may be considerably lower - or higher - than the one derived by using the average price-to-earnings ratio.
Those who see the lottery as a risky business, with limited growth potential and subject to the vagaries of public opinion toward gambling, might bid low. On the other hand, more optimistic investors may see opportunities for saving millions on certain expenses, while at the same time increasing revenues. These investors may also believe the lottery is worth more than 15 times current earnings if the state would repeal certain restrictive advertising measures believed to reduce sales.
A potential buyer might be willing to pay a higher price in anticipation of, or contingent upon, certain legal changes to enhance the market value of the lottery. In recent years, the state of Virginia has passed new laws to encourage companies to do business in Virginia. A buyer with a plan to turn the lottery into a $400-$500 million profit center might pay considerably in excess of $3 billion.
Unfortunately, there will be those who, due either to ideological paralysis or an instinctive reaction against anything unconventional, will object to even studying the issue. Have they a better proposal to fund the educational investments our children need now?
Selling the lottery would require several hard and immediate choices. For example, the sale would mean the state loses the lottery's annual contribution to the general fund. Anyone advocating the sale of the lottery must discuss this unavoidable result.
Some of this money would be recouped by the corporate income taxes paid by the new lottery company. But the question is valid: The state budget would have lost a revenue stream of about $290 million in this fiscal year. By selling the lottery to private enterprise, today's citizenry would be making an historic choice on balancing current demands against future needs.
Suddenly, we would have the billions needed for immediate investments in education to ensure the future development of our children. This investment would have a great long-term payoff. However, a tougher budget discipline would be mandated for the next several years. This might necessitate a greater level of current sacrifice for the benefit of our young people and future generations.
Ultimately, growth in the state economy and wise governing practices would enable an efficiently managed state to adjust for the lack of annual lottery contributions to help fund current expenses. Ultimately, what is good for our future leaders is good for America and Virginia. But there is no free lunch.
So what will it be: investments for tomorrow or shortchanging the future? There is only one acceptable answer.
Selling the lottery provides a way to fund the future without shortchanging the present. Whether one is farsighted or nearsighted, it makes good common sense to explore the available options. It may also be possible to use the lottery-sale proceeds in such a way as to turn the $3 billion into $4 billion or $5 billion by using federal and state bonds in a carefully coordinated plan.
But first things first: Let's at least be willing to discuss new ideas to help all our children be all they can be.
Paul Goldman is a Richmond lawyer and former state Democratic chairman.
by CNB