HARTFORD, Conn. - What will they think of next?
Connecticut's speaker of the house wants to give the state's pension fund a 6% interest in the state lottery - worth about $160 million - as partial payment for the state's fiscal year 1996 cash contribution.
The state would thus make a cash contribution of just $69 million of the $229 million due for the fiscal year beginning July 1. The $160 million saved could be used for other purposes, said Thomas Ritter, House speaker and a Hartford Democrat.
Mr. Ritter's lottery proposal is receiving serious consideration in the Legislature, which adjourns May 8. A decision on the lottery proposal is expected by the end of this month.
State Treasurer Christopher Burnham, sole trustee of the $12.6 billion Connecticut Trust Funds, has deep concerns about the lottery proposal.
Mr. Burnham would rather the pension fund be left out of the lottery business.
Mr. Ritter's plan could be implemented in two ways: the pension plan can accept 6% of the lottery in lieu of cash; or, it can buy the stake from the state upon receiving the full $229 million cash contribution.
The pension fund would receive from its lottery investment a guaranteed rate of return equal to the return on its other investments - about 8%. Mr. Ritter predicts the fund could generate a projected rate of return of 12% tax free. That makes the lottery "a legitimate investment for the state employee retirement fund," he said.
Mr. Burnham, however, said his office is still analyzing whether the lottery is a good investment.
"If they provide the cash, and then we are expected to buy 6% of the lottery, that is clearly under my purview, and we will treat it no differently than any other (prospective) investment," Mr. Burnham said.
The pension fund might hire an investment bank to provide a fairness opinion and to assist with the due diligence, said Mr. Burnham.
"Our primary concern is the illiquidity of the investment," said Mr. Burnham. "We are sitting on $1 billion of illiquid investments between our real estate and venture capital portfolios, and we are careful in managing that.
"The question is how are they (the Legislature) going to present this," said Mr. Burnham. "We will see how it plays out."
Mr. Ritter's proposal is a variation of one by Gov. John Rowland, which would privatize the Connecticut lottery. A spokesman for Mr. Rowland said the governor doesn't have a position on the pension fund proposal, but he is interested in talking about the details with Mr. Ritter.
A quasi-public corporation - Connecticut Lottery Corp. - should be created to own and operate the lottery, according to the Connecticut Lottery Privatization Implementation Plan that Mr. Rowland commissioned.
Under the plan, the lottery's ownership structure would convert to a partnership one year later with the CLC, a wholly owned corporation of Connecticut, becoming the general partner.
Partnership interests - totaling 6% - would be sold at that time to the public.
Mr. Ritter, however, said his proposal will save the state investment banking fees and would circumvent federal regulations that would apply if the lottery were sold to private investors.
A sale to private investors would require the approval of the Internal Revenue Service and the Federal Communication Commission. The state lottery is now exempt from paying federal tax, but privatization would change that. Also, FCC regulations prevent anyone other than the state to advertise gambling operations.
Mr. Ritter said his proposal "is much simpler and less expensive" than the governor's. "Instead of a sale, the state would simply transfer 6% of the lottery to the state employee retirement fund at a value of $160 million.
"Instead of sharing ownership with private investors, the new co-owner would be the state's own pension fund," Mr. Ritter said.
And, Mr. Ritter claims, the returns - even though they are tax-free - would be attractive to the pension fund.
Mr. Burnham said a tax-advantaged investment does not benefit the pension plan.
"It means nothing to us," he said.