Lottery profits are dedicated by law to education, but in an infamous shell game, any boost in funding for education from the Lottery reduces pressure on other sources of funding. In other words, $28 million more from the Lottery means $28 million from the general fund that can be spent elsewhere. This is in addition to the $973 in excess revenue that was collected in the fiscal year compared to the original Strickland budget – over $1 billion that carries over and helps plug the hold in Governor Kasich’s first budget.

Don’t expect the good times to last long. The Lottery estimates that casino gaming, set to come online in fiscal 2013, will eat away at its monopoly and result in a 5% decline in revenue.

According to the Dispatch, late last week the Speaker hinted that the provision would not survive conference committee:

This afternoon, House Speaker William G. Batchelder said big issues are unresolved. That included public-construction reform and efforts to privatize the Ohio Lottery and Turnpike.

He said the lottery provision might be removed.

You might wonder what it takes to reject a budget proposal that benefits a prolific campaign contributor like GTECH. After all, charter school profiteer, David Brennan did pretty well in Batchelder’s chamber. Unfortunately, GTECH and proponents of Lottery privatization do not have the law on their side.

From Ohio’s Constitution (§ 15.06):

(A) The General Assembly may authorize an agency of the state to conduct lotteries, to sell rights to participate therein, and to award prizes by chance to participants, provided that the entire net proceeds of any such lottery are paid into a fund of the state treasury that shall consist solely of such proceeds and shall be used solely for the support of elementary, secondary, vocational, and special education programs as determined in appropriations made by the General Assembly.

In other words, only a state agency can run the Lottery. And the Constitution isn’t the only place that says so. The US Department of Justice Office of Legal Counsel issued an opinion memorandum pointing out that Federal law prohibits the promotion and advertisement of lotteries in interstate commerce, but grants an exception for lotteries “conducted by [a] State acting under the authority of State law.”

Meaning, while the State could hire a private company to perform certain functions, it must retain control over all major Lottery decisions, profits and assets. In Illinois, the only state DOJ has approved for such an arrangement, all the collective bargaining arrangements remain in place, as do minority hiring requirements and veto power for the State lottery over all decisions made by the operator. Doesn’t sound quite like what GTECH had in mind when it write a provision to “convert the State Lottery from a state-run entity to a commercially-run enterprise”, nor does it sound remotely worth the 5% of Lottery profits the Senate was reported to be contemplating paying a private operator.

In his remarks, Batchelder took a thinly-veiled swipe at Kasich and his band of lawyers who apparently can’t shoot straight*:

“The governor’s people are excellent, but the quantity of stuff they’ve taken on (is) so great that some of these things may not have adequate definition.”

Ouch.

* And if you think this proposal didn’t originate with the Governor, you’re not paying attention. GTECH lobbyist and privatization author Mike Dawson is partner with Kasich lobbyist/BFF Don Thibault.

Well, as it turns out, the answer is simple. The revenue isn’t going to materialize anytime soon. Even though the Let Ohio Vote people (aka, a team comprised of the husband of Kasich’s chief of staff and his prisons spokesperson) are unlikely to pursue a referendum, the ultra-conservative anti-gambling group, Ohio Roundtable, has said it intends to immediately pursue a lawsuit challenging the constitutionality of expanding the Lottery to racetracks.

It’s possible Kasich anticipated the lawsuit, even coming from his right flank, which could explain why he accepted less than Strickland had demanded from the racetracks (which the Dispatch, at the time, said was too little). This, by the way, is why I only estimate that the conference committee has $1.1 billion–and not more–extra money to play with. So don’t expect education to get a boost thanks to this historical expansion of the Lottery, at least anytime soon.

The Roundtable’s lawsuit is interesting on many other grounds. They claim that by paying more in voluntary fees and getting a deal on the Commercial Activities Tax, the casino operators are violating the language of their own constitutional amendment from 2009. They also say that lottery privatization, another budget proposal currently being considered, is unconstitutional on the grounds that Ohio voters approved a ‘state agency’-run lottery, not one operated by a private company. We’ll keep an eye on the Roundtable’s activity, and even if budget season ends and this site goes dormant, we’ll have more for you over at our sister site, Plunderbund.

One major source of new revenue that wasn’t part of Keen’s prepared testimony, but came up with reporters after the hearing was Kasich’s announcement yesterday that the state would go forward with video slots at racetracks. That deal will apply a 33.5% tax rate against $1.266 billion per year in revenue. The deal also requires track owners to pay $350 million over the first two years to get into the slots game. Our math suggests this adds, at minimum, $750 million to the biennium, if you assume it takes the tracks a year to get their gaming operations up and running.

But Keen says to legislators, essentially “don’t spend that money yet,” explaining that we can’t really count on it so we should wait to appropriate it at some later date. What does he mean?

Do they think their own deal is going to fall through?

Do they think there will be lawsuits such as confronted Governor Strickland to stop Lottery expansion? Funny because most of the people behind the last challenge (Let Ohio Vote) now work for the Kasich administration and can safely be assumed not to sue him.

Or would they just prefer to keep that money in their back pocket so that Kasich can announce a tax cut sometime in a year or so as he prepares to gear up for re-election? If that’s true, they’re essentially telling legislators in the meantime: “yeah sorry about cutting your local school district and local governments, resulting in huge tax increases at the local levels that your constituents will be pissed off about, but we’re going to hang onto the money for now. Hey, good luck in those elections next year!”

We’ll keep watching, but had to ask the question. What does everyone else think?

What does Ohio get in exchange for this $10 million annual windfall?

• we lose around $100 million per year in CAT revenue (based on estimates of CAT at “$tens of millions” per casino, per year
• we lose $215 million per year in tax revenue from video lottery terminals by lowering the tax rate from 50% to 33%
• we lose $280 million in up-front fees from the 7 racetracks by lowering them from $65 million to $25 million each

But, hey, we get $10 million!!

Seriously, is this a joke? This clearly comes from the Lehman Brothers school of deal negotiations.

Conference Committee should reject this package and retain current law that sets VLT fees and revenue. The state, and education specifically, since that is where Lottery profits are earmarked, is the big loser here. We could go forward with VLTs and bring in a lot more money and the casinos can take it or leave it. Instead, we give up a huge chunk of that all for $10 million? No way should legislators accept that while their schools are cutting programs and teachers left and right.

If you recall, the reason this negotiation is taking place is because the Governor concluded the state got a bad deal with its $50 million-per casino licensing fees and 33% tax rate. This “bad deal” was spelled out to voters, who then approved it, so apparently Kasich is not particularly impressed with the judgment of Ohioans. But he should know better than anyone that, in this economy, Ohioans will vote for anything if it promises jobs. This bad deal is also enshrined in Ohio’s constitution, so the only way to change it is to ask Ohio voters to again amend the constitution.

The constitution being a mere technicality to Kasich, he charged ahead into negotiations. His two main leverage points were:

• threatening Video Lottery Terminals at racetracks, and
• applying the state’s Commercial Activity Tax to gross, rather than net wagering.

Unfortunately, neither of these are really leverage.

The Tax Department and Legislative Services Commission insist that, regardless of any additional language in the budget, the CAT already applies to gross casino wagering. In turn, the casinos have said they will sue to show otherwise. So, unless the Governor announces an agreement today that the casinos will not sue and will go along with paying the CAT on gross wagering, this one will be a loss on the part of Kasich who forced the House Speaker to reverse himself and include a CAT amendment in the state budget.

With VLTs (we’ve discussed this before), the state stands to rake in $650+ million per year in revenue from racetrack slots. So if Kasich is willing to give that up in negotiations with casinos, he better get something approximately that valuable in return. We think it’s extremely unlikely that he will. So this was a bogus negotiating tactic to throw in the mix.

Rumors are already leaking out about the deal. The casinos will pay a newly-invented annual fee (which we will bet $100 is nowhere near what VLTs will bring in), the state will go forward with VLTs, and the CAT will be applied to net and not gross wagering.

If this is true, it means the governor was bluffing. Fortunately, for the state of Ohio, its tax revenue and jobs prospects, the casinos were nice and didn’t raise him all in. In the end, he folded his cards. Time will tell – we expect an announcement in Cleveland at noon.

One important note: VLT revenue will be substantial (in 2009, a 14-month estimate was $933 million). And, unlike casino taxes, taxes on lottery slots go to the state, for the benefit of education (that’s also in the constitution!), so if a deal today includes racetrack slots, we expect and frankly demand to see a corresponding increase in education funding in the final version of the budget. This is something everyone should be watching for.

Ohio Lottery

• Governor’s proposal: none; at the time the budget was introduced, he said he needed more time to get advice. His best buddies promptly lined up lobbying business with the two prime, rival suitors for any private Lottery operation. His budget did exempt Lottery rules and fees from legislative oversight.
• House amendments: none
• Senate amendments: first introduced a requirement, written by one of two main Lottery vendors, to privatize Lottery by a date certain in 2012; after massive criticism, (including an expression of “shock” by Speaker Batchelder), the Senate rewrote the provision to require the state to examine Lottery privatization and report back to the Legislature later in 2011.
• SCORE: the public gets a rare, if partial, win
• By the way, if Kasich tells you he had nothing to do with this provision, don’t buy it. The amendment was written and submitted into the Senate bill by the partner of Kasich’s lobbyist BFF Doug Preisse. There’s no way this wasn’t done without the Governor’s approval.

Liquor Enterprise

• Governor’s proposal: transfer the state’s liquor enterprise to JobsOhio, who will then, in turn, sell the revenue stream from liquor profits to the private sector for pennies on the dollar (see our earlier coverage), break up various parts of the enterprise and further outsource them without oversight
• House amendments: specifies that only the Division of Liquor Control can be hired by Jobs Ohio to operate the liquor enterprise; and JobsOhio can sell the enterprise back to the state at some later date
• Senate amendments: provides oversight of all contracts between JobsOhio and the state to operate the liquor business; notably, the Senate did not incorporate Grendell’s amendment to ensure the state didn’t underprice liquor profits, and use the proceeds to fund local governments and schools
• Status: still in the bill, with some modifications by both House and Senate
• SCORE: massive loser for the people of Ohio who will see a revenue stream in excess of $250-million a year dry up to launch a very dubious “private non-profit corporation” to conduct state economic development activities without public oversight or transparency.

Prisons

• Governor’s proposal: sell off five prisons to the private sector
• House amendments: make it six, and exempt the operators from all state and local taxation
• Senate amendment: killed the House exemption, requiring private operators to pay taxes
• SCORE: still in the bill; very unlikely to save taxpayers any real money as high-risk prisoners will be transfered to state-run, not private facilities.

Oil and Gas drilling in state parks

• Governor’s proposal: expands oil and gas drilling into state lands, including state parks; reduces funding for state parks, which have a maintenance backlog in the $100s of millions. Drilling has been estimated to be worth less than $5 million per year for the state and have potentially huge environmental consequences. Meanwhile, the Governor’s budget de-funded county soil and water districts completely–the very entities who could assist in ensuring discharge from drilling operation was properly routed away from streams and drinking water.
• House amendments: restored funding for soil and water districts
• Senate amendments: removes state parks from the mix, proposing to deal with it in separate, standalone legislation. The parks, meanwhile, are still drastically underfunded.
• SCORE: still a big loser; drilling may not come to state parks, but it’s coming to other public lands, and the parks still continue to be underfunded (personally I wouldn’t mind paying a couple bucks entry fee to use a state park, as is done in other states, rather than see them go without maintenance or perhaps even close, but god forbid we raise taxes on “Bob and Betty Buckeye”)

Everything else

• Governor’s proposal: give his budget director broad, unchecked authority to privatize anything in the state without involvement of the legislature for whatever price feels good. See our previous coverage (this was our site’s most visited and shared article)
• House amendment: removes authority to privatize anything except the Turnpike
• Senate amendment: requires legislative oversight and approval for any future Turnpike privatization
• SCORE: big fail for Kasich, a win for the legislature and the public

Yes, the state got a shitty deal in the constitutional amendment – the only revenue we get is a one-time licensing fee that is earmarked for specific workforce training purposes. After that, all the tax revenue goes to local governments, schools and a few specified state programs.

But the casinos have an ace in the hole — they have a constitutional guarantee and protections against any new fees or taxes. And the voters weighed in. Kasich has very little leverage, is starting to piss off local elected officials and those seeking employment at the casinos. If he holds this thing up for much longer and casinos don’t get built and create all those promised jobs, he’s going to own that and a lot of people will not be happy. And the most he can gain is perhaps “tens of millions of dollars,” say most accounts. Is it really worth putting even more of his popularity at risk, jeopardizing revenue to local governments and schools and thousands of jobs in the process for that?

His ace in the hole, as I pointed out yesterday, is that the state can always launch video lottery terminals at racetracks (or hell, even expand it to bars and bowling alleys) and get a much larger share of that revenue (fifty percent versus around three for casinos). Why not just do what he can to encourage the casinos to move forward, but ensure revenue to the state by moving forward with VLTs, the rules for which he can completely control, and let the chips fall as they may. No one could accuse him of costing jobs and he could bring in much-needed revenue for schools, redirecting GRF dollars to a tax cut or whatever stupid idea he wants to fund.

Help me out here, someone tell me in the comments why Kasich is making the smart play by dragging this out.

The issue at play is whether Kasich can use whatever leverage he can muster to get the casinos to voluntarily cough up more money to the state. He insisted that the House include a provision in the budget to specify that the state’s Commercial Activity Tax applies to casinos gross wagering, not net. The difference is “tens of millions of dollars” annually from each casino, so somewhere south of $100 million per year for the state if successful. Beyond the CAT tax, the Casinos could be asked to voluntarily offer to pay more for certain fees, but again, we’re talking in the tens of millions of dollars, max.

One item the Governor’s advisors have indicated they intend to use as leverage are Video Lottery Terminals. You may recall the state proposed introducing what amounts to slot machines at racetracks, overseen by the Lottery Commission, back in 2009. A referendum campaign — led coincidentally by the husband of Kasich’s chief of staff, Beth Hansen — delayed the plan, but the group, LetOhioVote, subsequently dropped its effort, meaning VLTs can now move forward.

How can VLTs be used as leverage? If racetracks in Ohio have slots, it could cost Ohio casinos 25% of their profits. So Kasich’s advisors have suggested we threaten to move forward with the VLT plan to get the casinos to cough up more money. Here’s the problem — what happens if the casinos bite on this? The state puts VLTs back on the shelf. Here’s the trouble with that: VLTs are worth $650 million per year* in taxes for the state. In other words, Kasich is willing to give up hundreds of millions in order to get tens of millions? It’s mind boggling. And it has to be the worst effort at extortion ever on display in Ohio.

(*note: $765 million was estimated for a 14-month period in 2010 and 2011, or just over $54 million per month)

It’s like going all in with an open-ended straight draw when there’s a flush on the board. But I doubt Kasich is any good at poker, either.

Here’s what we propose: the Senate should include two amendments in the budget:

• one, requiring the Governor move forward with VLTs by a date-certain deadline, say September of this year. Budget the revenue for schools and call it a victory.
• and two, drop the amendment about whether the CAT tax applies on casino wagering. it’s not that much money, and what matters more is getting them built, the investment made and the jobs created. the Tax Department thinks the CAT applies regardless, so let the courts settle it.

(you’re welcome. Governor. And we won’t even charge you $400/hour for the advice)

The consultant fees — a percentage of the state’s revenues from casinos — of up to $15 million are to come from the Lottery Commission’s budget. The Lottery, whose profits are constitutionally required to be spent on education. It’s funny, because I had been wondering why the amount of profits the Lottery promises to deliver to the state are projected to decline in the next budget, after year upon year of increasing profits. They claimed in their budget testimony it was because of competition from casinos. But, now, according to the Dispatch story, it looks more like it’s due to payments to casino consultants.

Proceeds from the sale of lottery games are supposed to go to education. The Lottery can deduct its own expenses they incur from the sale of Lottery tickets, but I fail to see how spending money on consultants to tell the Governor how to raise more tax money from casinos is remotely allowable. Not sure? Here’s what the Ohio Constitution has to say (§ 15.06(A):

The General Assembly may authorize an agency of the state to conduct lotteries, to sell rights to participate therein, and to award prizes by chance to participants, provided that the entire net proceeds of any such lottery are paid into a fund of the state treasury that shall consist solely of such proceeds and shall be used solely for the support of elementary, secondary, vocational, and special education programs as determined in appropriations made by the General Assembly.

This needs to be investigated further. At best, it’s Kasich taking $15 million MORE out of public education. At worst, it’s a violation of the Ohio constitution.

And what are these consultants going to tell him – that the CAT tax applies to casinos so he can extract more money from them and give the consultants a cut? His own Tax Commissioner has already told him that the tax applies! Poor Joe Testa must be sad won’t get a multi-million $$ bonus for that advice.

This is a huge rip-off. Of casinos, of taxpayers, of voters and, sadly, of kids who rely on increasingly limited public funds for education. But, somehow, it’s unsurprising.