What if the Commonwealth were to offer “Lottery Bonds” to fund the current cash crisis. By “Lottery Bonds”, I mean a series of bonds that have the interesting property that they offer variable interest rates, comparable to the winners of a conventional lottery. One of them might return $10M or $20M (spread over 20 years), comparable to the grand prize winner of an existing lottery.
Here’s what I envision:
1. Bonds are issued with serial numbers in denominations something like the following:
– $100
– $1,000
– $10,000
2. Bonds carry interest rates that spread from those comparable to a savings account (1.5-2.0%) for the majority to some much larger amount for the winners.
3. Winners are statistically distributed, much like the existing lottery, to attract interest while still remaining enormously profitable for the state.
4. Lottery Bonds are targeted towards middle- and upper-class participants, as opposed to the predatory marketing practices of the existing lotteries.
5. Lottery Bond interest payments could be tax-free to Massachusetts residents.
6. Perhaps the state could strike a deal so that Lottery Bonds might be conveniently converted into savings account deposits for banks chartered in Massachusetts — helping neighborhood banks attract new accounts.
I’m mostly joking, but not entirely. We are in desperate need of cash. It’s clear that we aren’t going to be able to raise enough tax revenue in the time needed to address our staggering infrastructure cash needs. Are these any worse than casino gambling, slots, or existing lotteries?
Wouldn’t these encourage saving behavior by those currently being most victimized by the current lottery? While these aren’t “good” investments, surely they are better than lottery tickets.
Since state agencies already have the authority to issue bonds, set rates, and set terms, would these require any legislative approval?
I kind of like this. Cash for civic participation. It’s similar to the idea floated in Arizona for a $1 million prize to one lucky voter.
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p>BUT, would this not hurt local banks, and thus make it harder for individuals to get approved for loans?
Thanks for your kind words.
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p>I don’t see how this would hurt local banks, but that could be blind naivete on my part.
1) For the math to work in a lottery, you need a lot of losers, and a lot of “losers” who still make a percent or two of interest isn’t going to allow for that one big payoff. Where would the money come from?
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p>2) The reason for the uptick in the purchase of government bonds is because of their safety (as long as the issuer has a good rating). Low return, but little risk. This scheme (if you buy what I said above) would not provide that safety. It would be a high risk investment.
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p>In other words, if everyone wins, no one can win really big.
Everyone almost always ‘wins’ buying bonds… albeit very modest profits, over the long run.
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p>The state could issue these bonds with big ‘winners’ and make it feasible if everyone else ‘wins’ an even smaller interest rate than normal, probably a lot smaller.
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p>I still think you have a point, it’s hard to see this work in a way that could create enough big ‘winners’ that it would have a lottery-like appeal. I think this is a game that the state would lose, if it tried its hand.
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in addition to Jasiu’s excellent points is that lottery systems and gambling rely on instant or quick fixes/results. You buy your scratch ticket, scratch, and find the result. You buy your Mass Cash ticket and wait three days to find the results. If you’re trying to appeal to that crowd, they’re not going to buy a 7, 10 or 20 year “game,” even if there’s a near-guaranteed “win” of some kind.
I’m intentionally NOT trying to appeal to the “Mass Cash” crowd — that’s the point. Some of them — the smarter ones — may buy these if they were offered, instead of buying a $100 of scratch tickets.
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p>After all, why does anybody play Bingo at St. Theresa’s when they can play Mass Cash instead?
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p>My thought is to put an option on the table that is not predatory, that is not an insanely bad financial move, and that might be innocently fun for a broad cross-section of residents to “play”.
It can’t hurt trying.
Just thinking this through a bit…
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p>Any entity (state, city, town) that issues a bond tries to minimize the cost of borrowing. The fact that they can do this double-tax free (no federal or state income tax paid on the interest by the bond holder) knocks the interest rate down a bit. The bond rating and market conditions also figure in.
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p>No entity is going to issue one of these lottery bonds unless the total cost of borrowing is less than or equal to a standard offering. So that means the basic interest rate that the non-winners would earn would end up being some amount lower than a standard issue bond, depending on how big of an interest rate boost the winner or winners get.
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p>On the purchasing side, most activity in bonds (like stocks) happens in the market after the initial issuance. The interest rates would have to be set when the bonds are issued (i.e., the winners and non-winners are determined then) so that the market could price them and so that the issuer knows what to pay when the first interest payment comes due. If I purchased a lottery bond when it was issued and didn’t “win”, I’d now have an instrument that pays a lower interest rate and is therefore worth less than a similar standard issue bond on the market. So if I decide to sell it to get my principal back before the bond matures, the market will price it lower than if I had bought a standard bond. Personally, I would find that a disincentive.
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p>Finally, many (most?) people who own government bonds do so as a way to generate income. I don’t know how many people would be willing to gamble with the interest rate they’d get.
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p>But maybe you are thinking about attracting people who would not buy bonds otherwise. I’d have to be convinced that they could create a large enough market to make this work.
Thanks for your careful response.
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p>I am, in fact, thinking about attracting people who neither buy bonds or play the various lotteries today. Most residents don’t buy bonds (many can’t afford to). I think we already take enough from those who buy existing lotteries.
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p>I think the question of whether the resulting market is large enough to work is interesting. Perhaps those who understand the specifics more than I will consider it.