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Leonard Gilroy offers some advice to Kentucky’s neighbor, Virginia:

Lottery privatization makes sense in a number of ways. First, it’s difficult to argue that running a lottery is a core function of government. Put simply, businesses are best at running businesses, and governments are best suited to a regulatory and oversight role to ensure that the public interest is protected.

Next, state lotteries have a fairly stable revenue stream which can be maximized under private management. Private operators would have the incentive to introduce new, more popular games. And since lotteries are retail- and sales-driven enterprises — not areas of public sector expertise — private sector operators would more experienced and adept than government at using the latest technologies to target games to markets and generate more sales. With Virginia’s constitutional mandate that lottery proceeds be dedicated to education, this could mean more funds flowing into education with a reduced need to supplement them with state and local tax dollars.

Lastly, privatization would provide a means to transfer significant risks to private sector operators, most importantly the risks from competition with lotteries in adjoining states, casinos, and internet gaming.

Stephenie Steitzer has the scoop.

Stephenie Steitzer reports:

Versions of a proposed constitutional amendment on expanded gambling that would’ve guaranteed some of the casino licenses to horse tracks appear to have died in the House.

Instead, a proposal backed by Speaker Jody Richards, which would allow nine casinos with no guarantees the horse tracks would get any, appears to be the bill with the best shot of making it out of a House committee at this point.

I recommended the following in October:

If [Beshear is] serious about serving taxpayers, Beshear will insist on the following conditions for expanded gambling:

1. A strict limit on the number of casino licenses to be awarded.
2. A time limit on the validity of each license. Two years, for example.
3. Every hopeful licensee must bid for licenses at auction with no special treatment for any bidder or industry.

In essence, the winning bidder will pay rent for the privilege of owning a casino license. The value of the licenses will largely be a function of their scarcity and the revenues that the casinos can generate.

Unfortunately, Mr. Beshear’s commitment to do right by Kentucky taxpayers in pushing for expanded gambling is in question.

In August, Mr. Beshear told the Lane Report, “It would be a licensed approach where the state would create so many licenses and then, for instance, some of the racetracks would be able to have a license and there would be competition for licenses for any free-standing locations.”

Mr. Beshear appears to understand the value of creating an auction process for handing out casino licenses, but he’s less clear on whether racetracks will have to pay the same price when auction time arrives. Mr. Beshear needs to clarify sooner rather than later that expanded gambling will not result in a massive giveaway to Churchill Downs or other racetracks.

It seems clear that Beshear’s bill was crafted with the profits of racetracks in mind. The one offered by Jody Richards, while I think nine is perhaps too many licenses to maximize revenue, at least recognizes that the purpose of casino gambling is to get revenue in the door rather than to bail out a small subset of Kentucky’s “signature industry.”

Sadly, any added revenue provided by gambling won’t be used to execute the “best case scenario”: retire state debt, ease the pain of the inevitable privatization of state pensions or reduce taxes for Kentuckians. Like a credit card in the hands of an irresponsible teenager, that added revenue might put Kentucky’s finances in worse shape.

The Courier Journal reports that the proceeds from casinos under the governor’s proposal:

…would be divided with 50 percent for education; 20 percent to healthcare; up to $2 million for treatment of compulsive gambling; 3 percent to host jurisdictions and 5 percent each to support city and county programs, with 17 percent divided among other programs ranging from substance abuse to wildlife.

Separate accounts would be established to support the state’s horse industry.

By my math, that adds up to 95 percent of the proceeds listed. Maybe the “horse industry” gets the other five?

Of course at this point it is important to differentiate the horse industry from the horse track industry. The horse industry raises, breeds and trains horses of all kinds in Kentucky — not just thoroughbreds. The horse track industry provides a stage on which for thoroughbreds to perform and pays purses out of a portion of gambling revenues. They also run simulcast operations and sell food, beverages and t-shirts.

Bottom line? One involves getting up really early every morning and mud on your shoes. The other does not. Guess which one is highly profitable?

According to Plunkett Research, Churchill Downs, Inc. made almost $30 million on more than $376 in sales in 2006. Their profit to earnings ratio is a healthy 33.59, and they rank third in sales and second in profits among their major competitors. Their top executive salary was $500,580 with an equal amount in a bonus. The company is worth about $556 million.

For comparison, the purse for winning the Kentucky Derby is $2 million.

Here is the financial information and an interesting chart of Churchill Downs stock price over the last five years.

There are a lot of benefits to being Governor of Kentucky. You get tickets to the Derby. You get to go to all the UK-UofL games. And you get to appoint lots of friends to powerful positions on state boards.

For years one of the most sought after and lucrative appointments was to the state fair board. Now that is about to be overshadowed in a big, big way:

The plan calls for: Creation of a seven-member Gaming Commission with four-year terms. The members would be appointed by the governor and approved by the Senate. The commission would hire an executive director to oversee day-to-day operations.

Personally, I would like to see the kind of treatment a Gaming Commission member would get upon walking into a casino. Emperor’s Suite at Caesar’s Palace, anyone?

Creating new jobs, indeed.

Steve Beshear will not raise $500-million with his plans for (gulp!) 12 casinos in Kentucky. The licenses for the first (gulp!) seven casinos will essentially be given away. The C-J’s Stephenie Steitzer has more:

His proposal calls for seven casinos operated by horse tracks — either at the tracks or elsewhere in the respective counties — and five free-standing casinos.

The five free-standing casinos could be in Daviess County, Christian County, Kenton or Campbell counties, Boyd or Greenup counties and Laurel or Whitley counties. Those casinos would be subject to a local referendum in the city or county where they would be located.

Beshear said $500 million could be raised through the sale of the casino licenses.

What’s happened is this: Gov. Beshear has agreed to give race tracks exclusive market area for the casinos that they will own. Why else would casinos owned by non-racetracks be barred from existing in Jefferson (Louisville), Fayette (Lexington) or Boone counties?

Exclusive market area would raise the value of the licenses, but there’s no clear evidence that the tracks would pay any substantial sum for the licenses they’d receive.

But read the casino amendment carefully:

“Are you in favor of increasing state financial support for elementary and secondary education, expanding health care for senior citizens, children and others, support for local governments, and combating drug and alcohol abuse and other important programs by permitting the General Assembly to authorize up to five casinos subject to approval of the voters in the city or county where the casino is located; and up to seven casinos licenses for existing horse racing associations, all of which will be subject to the approval of a state agency created to oversee casino gaming?”

Did you catch that? The casinos that would be run by racetracks would face no local option. The casinos run by other operators would have to negotiate local elections. It’s also likely that racetracks would dump money into local campaigns opposing the operation of these competing casinos.

Nonetheless, local communities would not be able to prohibit their local neighborhood racetrack from starting up a casino. That’s not necessarily bad. After all, I wouldn’t want my local government to decide that restauranteurs couldn’t sell their patrons a beer with their meals and … oh wait, local governments do exactly that every day. And it’s not (entirely) unreasonable.

So why do casinos allow state governments to overrule local governments in this one case, especially when community standards are so clearly implicated? That’s a good question for Steve Beshear.

So why won’t he raise the promised $500-million? Because after you’ve given away licenses for seven casinos to be operated by racetracks that won’t have to overcome local opposition, the remaining five casino licenses are severely limited in their location. Also, those casinos will have to overcome some local opposition. Admittedly, it might not be much opposition given the counties named.

It’s hard to get away from the idea that this is a big giveaway to a particular industry. That’s pretty disappointing.

Steve Beshear wants to give the horse industry many many many millions of dollars:

(Herald-Leader, Feb. 12, 2008) He said earlier in the day that his proposal will set up different licensing provisions for Kentucky-based racetracks and casino companies, a move that suggests operators of free-standing casinos might be required to pay heftier licensing fees.

“It’s certainly possible,” Beshear said.

He also indicated that the licensing of racetrack-based casinos could move more swiftly, something that would allow the fees to be put toward the state budget sooner.

Beshear said that tracks would have a designated number of casinos but other operators would probably face a bidding process, “and that will take longer to determine the winner.”

What does that mean? It means that Beshear will essentially give race tracks casino licenses by allowing to avoid an auction process. Rather than maximizing revenues by pitting tracks against casino operators in an open auction process, Beshear basically is giving away the first few licenses, which reduces the value of licenses that would be auctioned.

I said Beshear might do exactly this before he was even elected.

Let’s not forget what Aaron predicted (just last month) about tomorrow’s Nevada caucuses.