Needs an accountant: Why Illinois wrote IOUs to lottery winners

Idalia Vasquez, manager of a GoLo gas station in the US town of Hammond, Indiana, enjoyed a temporary boost in the sale of lottery tickets in the latter half of 2015.

Sales increased by up to 80% as residents of Chicago – 20 miles from Hammond, in the neighbouring state of Illinois – travelled every week to take part in Indiana’s Hoosier Lottery. “We have long lines, but they’re patient with it because Illinois is not paying,” she said. “They’re all coming here and saying: ‘I’m from Illinois, how do you play it here?’”

Since August, the Illinois lottery had been giving IOUs to those who won $25,000 or more. By October, winners of $600 or more were also not getting paid. To add insult to injury, the Illinois state lottery was still going ahead every week. Indeed, the state was running TV adverts promoting it. “If any private business engaged in this kind of conduct – selling tickets and not paying out the winner – the state would shut them down and indict them for fraud,” said Thomas Zimmerman, an attorney representing a number of disgruntled IOU recipients.

State deadlock

Illinois’ lottery crisis was a side effect of a stand-off between its Republican governor, Bruce Rauner, and its predominantly Democrat state legislature over the state’s budget for 2015-16. The two camps fundamentally disagreed over how best to deal with Illinois’ fiscal woes. In a ranking of all 50 US states by the Mercatus Center at George Mason University in Virginia, the state came last in terms of its fiscal condition for the 2013 financial year. At the time of writing, the state was $147bn in debt – $11,409 of debt per citizen.

The state has the highest unfunded pension liability in the US, at $111bn. In response to Illinois’ mounting debts, the state legislature prepared a budget that proposed raising taxes to plug the gap between spending and earnings. Governor Rauner, however, was elected on a campaign that promised significant reforms designed to give the state more fiscal stability. He refused to sign off any tax increases without commitments to immediate reforms. The budget was due to be signed off in July. By November, there was still no sign that the two sides’ differences would be reconciled.

Deepening hole

Key services, such as health and education, were still being funded despite the lack of a budget, as were public-sector wages. But, without a budget to fix taxation or public-sector cuts, this spending increased the state’s already sizeable deficit. In late October, the Democrats estimated that $5bn would be added to the state’s deficit during 2015-16, and the money the state owed in bills would grow to $8.5bn by the end of 2015 if an agreement on the budget could not be reached. Of that $8.5bn, an estimated $288m was owed to lottery winners, according to Zimmerman. And that amount is growing every week.

Ironically, the lottery is actually one of the few government functions that pays for itself: prizes are determined based on ticket sales. But, as the budget was not cleared, the lottery had no authority to issue cheques. The fact the prize money was available but couldn’t be paid out did little to appease the winners. “We finally can have a comfortable life,” said Susan Rick, who won $250,000. “Suddenly, you’re going to pull the rug out from underneath us.”

Funding release

The constant bad press around the unpaid lottery winnings (including in Forbes and on topical comedy programme The Daily Show) forced Illinois to release emergency funds to cover the money owed; $1bn was released via a short-term funding Bill that also released $582m in fuel taxes to local governments, $77m for emergency services, $31m for road maintenance and $165m for winter fuel aid. With no sign on the horizon that Rauner and the state legislature will reconcile their differences, all of this money has been thrown into the ever-deepening black hole that is Illinois’ public finances.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.