THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, October 24, 1995 TAG: 9510240722
SECTION: FRONT PAGE: A10 EDITION: FINAL
TYPE: Another View
SOURCE: By PAUL GOLDMAN
LENGTH: Long : 103 lines
Right now, Gov. George Allen and the General Assembly are sitting on $3 billion waiting to be invested in our children's educational future. 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, a Republican, and the Democrats and Republicans in the General Assembly can get the credit. How? Easy. Sell the lottery - or sell a long-term franchise to operate 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.
On the business level, the Virginia Lottery is no different from any of the incredibly successful privately held businesses in Hampton Roads. Will the owners ever sell, either to a bigger company, a group of new investors or issue shares to the public? Undoubtedly, they periodically check with an investment banker to determine their companies' potential market value.
Governor Allen and the General Assembly owe the same 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 present 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 NYSE or NASDAQ market index. Think of it: Virginia, in a few short years, has developed a business worth billions of dollars.
Legislators have proposed selling the state-owned ABC business to private enterprise. Why not the lottery? On paper, it might bring 20 times more money to the state. Admittedly, the actual value of the lottery 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 about 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 present 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, 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 million or $500 million profit center might pay considerably more than $3 billion.
Unfortunately, there will be those, either due to ideological paralysis or an instinctive reaction against anything unconventional, who will object to even studying the issue. Have they a better proposal to fund the educational investments that our children need now?
Selling the lottery will require several hard and immediate choices. For example, the sale will 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 raised is a valid one: The state budget would have lost a revenue stream of about $290 million in fiscal 1995. By selling the lottery to private enterprise, today's citizenry would be making a historic choice on how to balance 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 will 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 would provide a way to fund the future without shortchanging the present. Whether one is farsighted or nearsighted, it makes good sense to explore the available options. It might also be possible to use the lottery sale proceeds in such a way 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 discuss new ideas to help all our children be all they can be. MEMO: Mr. Goldman is a former chairman of the Virginia Democratic Party and a
former member of the State Council of Higher Education.
by CNB