Hey, lottery winner, want a lump sum? Let the game begin

Massachusetts lottery winners are rushing to cash in on a recent change in state law that allows them to negotiate with private companies for a lump-sum buyout of all or a portion of their 20-year income stream.

Since November, when the change in the law took effect, nearly 270 lottery winners have made the decision to give up a chunk of their future prize payments in return for a lump sum that can be used for such immediate needs as buying a new house or paying off existing loans and debts.

But not everyone is happy with the new arrangement. Some lottery winners say it's not fair that they have to pay a private company hundreds of thousands of dollars to gain immediate access to their own prizes.

Louise Outing, a 94-year-old retired waitress from Everett, sued the lottery in Norfolk Superior Court late last year in a bid to change lottery policy to cash out her prize immediately. She didn't want to go through the expense of cashing out through a private company and, for obvious reasons, didn't want to wait 20 years to recover the full jackpot.

The lottery prevailed in court, but Outing's attorney, James Dilday, questioned the fairness of the ruling.

''It's her money," he said. ''Let her do what she wants to do with it."

Until late last year, there was no way for a lottery winner in Massachusetts to take a lump sum upfront instead of the 20-year payout. Lottery winners grumbled about the system, but legislation to change it never went anywhere.

Encore Funding of West Palm Beach, Fla., a company that facilitates lump-sum payouts for lottery winners across the country, launched a lobbying effort here to change the law.

''It's a strange form of paternalism in which a state permits its citizens to sell all that they own to buy lottery tickets, but then asserts a caretaker's interest in controlling how and when the winnings are spent," the company said in a commentary on its website. ''The simple fact is that the prizes belong to the winners, and the winners ought to be free to save, spend, or invest in accordance with their own life preferences."

The Legislature, in part motivated by the prospect of a short-term jolt in tax revenues as lottery winners cash out, changed the law last July to permit heavily regulated but privately financed prize buyouts.

The legislation effectively turned lottery winners into bond issuers, selling their future income streams to private companies in return for lump sum payments. The cost of cashing out varies, but lottery officials who have been monitoring the transactions say prize winners give up 7 to 20 percent of their future income stream in return for a lump-sum payout. The average discount rate is 11 percent, the officials said.

In Outing's case, she won a $5.6 million jackpot, but she didn't really win $5.6 million. She won approximately $3.5 million, according to her attorney, which the lottery used to purchase US Treasury bills that would yield payments over 20 years that would add up to $5.6 million.

Dilday said Outing was offered a $3.1 million lump-sum payment by one company, about $400,000 less than her estimated $3.5 million base prize. Dilday said he asked the lottery to give Outing the $3.5 million rather than using the money to purchase a 20-year revenue stream, but the lottery refused.

Lottery officials say they don't offer winners the option of choosing between a lump-sum payout or a 20-year income stream because it would make it impossible to market the lottery effectively.

Beth Bresnahan, the lottery spokeswoman, said big jackpots are the lifeblood of the lottery. She said the minimum jackpot on Megabucks is $400,000 paid out over 20 years, but only $200,000 if cashed out immediately. She said the lump-sum option, which would have to be disclosed, isn't big enough to attract the bettors needed to make the lottery a success.

''It would kill our lower jackpot games," she said.

The lottery does offer a cash-out option on the multistate Megamillions game, in part because the jackpots are so big to begin with. Last week, the Megamillions jackpot was $102 million over a 20-year payout period, or a $59.8 estimated preliminary cash option.

The lump-sum payout system created by the Legislature requires that lottery winners hire an attorney, a certified financial planner, and go before a judge before assigning their prize money to one of 15 companies approved by the lottery.

Robin Shapiro, chief executive of Encore Funding, said the companies involved in the business either keep the prize assignments or sell them to insurance companies.

''Think of this as buying an extremely illiquid but relatively low-risk, long-term bond," he said.

For prize winners, negotiating a buyout is a lot like negotiating a mortgage. The goal is to get the best rate possible under the best terms.

''It's no different than going to a Ford dealership and bargaining for a truck," said Bobby Britton, a Stop & Shop employee who won a $4 million lottery prize last April.

Britton was entitled to $200,000 a year for 20 years under the terms of his lottery prize, but he decided to sell seven years of lottery payments (total value $1.4 million) for $1.135 million. ''It enabled me to go out and buy the house of my dreams, make some investments, and start working part time," he said.

In negotiating the deal, Britton said he contacted about eight companies and tried to get them into a bidding war for his money. He said the strategy was successful. The deal he signed with Prosperity Partners Inc. of Lake Park, Fla., in January was about $131,000 more than the initial offer he received.

Britton offered two pieces of advice. He said lottery winners should hire their own attorney and financial adviser and use them. Of the 37 prize assignments that took place on the day he was in court, Britton said he was the only one there with his attorney present.

He also said prize winners should resist taking the cash advances that so many companies dangle in front of them. He said a cash advance typically locks the prize winner into dealing with that company, reducing his or her bargaining power.

Bruce Mohl can be reached at mohl@globe.com.