Calculating the value of leasing the Hoosier Lottery

I decided to do a calculation, to make a judgment about whether leasing the lottery would "pay off." Here are my assumptions: The lease runs 20 years. The current state general fund share of the lottery (about $190 million) will grow at a 5% nominal rate. The gross revenues of the lottery will also grow at 5% per year. The sale of the lease will generate an up-front payment of $1 billion, plus an annual payment of $200 million, plus 5% of the excess of gross revenue over $700 million (current gross revenue is about $725 million). I use a 5% nominal discount rate.

The current revenue flow ($190 million growing at 5%, discounted at 5%) for 20 years is simply $190 million times 20, or $3.8 billion.

The discounted revenue flow from leasing the lottery (annuitizing the $1 billion up-front payment over 20 years--about $76 million pre year) is about $3.7 billion.

So it's close to break-even.

For the state to come out ahead, the lessor will have to generate faster revenue growth than 5% per year. At 10% per year revenue growth, the PV of the general fund revenue would be $4.1 billion. But 10% revenue growth would almost certainly lead the state's share to rise in any event (let's say by 10% per year as well). Oops--the PV of that revenue flow would be $5.8 billion--not so close to break-even.

The lessor would have to generate faster growth in revenue that the state could on its own for this to be a good deal.

I'm still not sure what to make of it.