New Jersey expected to select private firms to run its lottery

The Communications Workers of America has vowed to challenge the Christie administration’s decision to partially privatize the New Jersey Lottery by awarding a contract to a consortium similar to one that remains under fire in Illinois.

Last Friday afternoon, the state treasurer’s office announced plans to award a 15-year contract to Northstar New Jersey Lottery Group to take over marketing and sales of the $2.8 billion state lottery.

The joint venture that includes GTECH Corporation (41 percent owner), Scientific Games International (18 percent owner) and a unit of the Ontario Municipal Employees Retirement System (41 percent owner) was the sole bidder and, as part of the terms of the deal, has agreed to make an upfront $120 million payment to the state.

The contract, about nine months in the works, has been controversial for a number of reasons.

Democrats in the Legislature have been complaining about the administration’s secrecy involving the matter. Convenience store owners have said it could hurt their businesses. And the state workers’ union fought it because it could mean unemployment for about 60 lottery workers. The CWA has vowed to keep fighting the move in court.

“We are contacting the head of the New Jersey State Lottery immediately to challenge the Christie administration’s giveaway and will take every action at our legal disposal to stop it,” said Seth Hahn, legislative and political director of the CWA in New Jersey. He called the privatization “illegal.”

Bill Quinn, a spokesman for the Department of Treasury, said the action the department took on Friday was to sign a notice of intent to enter into the contract. There is now a 10-day period in which any citizen or other bidder – in this case, there are none – can protest the contract before state officials sign it.

Barring a successful legal challenge, there would be a nine-month period of transitioning from state workers to the private contractor doing the sales and marketing tasks. It is during that time that the contractor would determine how many state lottery workers it might hire.

Once the contract is signed, the $120 million one-time payment is expected to be made by June 30, Quinn said. That will help the state plug a revenue shortfall in the current budget. The state has already announced it is delaying $400 million in property tax rebate payments from May, near the end of the current budget year, until August.

Money to help balance the budget is one reason opponents assert the administration pushed through the privatization of an otherwise successful and profitable lottery – the New Jersey Lottery ranked fifth in sales per capita in the nation and had the highest net income margins in 2010.

But treasury officials say the move will ensure that the lottery grows and provides additional income to support education and state institutions. According to treasury officials, the New Jersey Lottery has provided more than $20 billion in support to state institutions and education programs since 1970, including $950 million in the fiscal year that ended June 30, 2012.

“The contract we plan to enter into with Northstar New Jersey protects that legacy commitment to New Jerseyans by positioning the lottery for sustained growth and continued success in the face of an increasingly complex and competitive marketplace,” said state Treasurer Andrew Sidamon-Eristoff.

But Hahn continued to assert the deal is a bad one for state workers, businesses and New Jersey, criticizing the administration’s decision to announce the contract on a Friday afternoon.

“At every turn, the Christie Administration has steadfastly refused to answer questions and been secretive in trying to slip through their risky, unpopular lottery privatization scheme,” Hahn said. “True to form, they’ve decided to release their decision to award a 15-year contract at 4 p.m. on a Friday in the hopes that no one will notice. This short-sighted, illegal, politically-connected deal needs to be examined in the light of day.”

The administration first put out its RFP last August without any fanfare. Democrats in the Assembly held hearings on the matter, although they had no power to take any action to stop it. Neither Sidamon-Eristoff, nor the head of the lottery appeared to testify at either hearing. That’s one reason why the Assembly Budget Committee passed AR151, which if approved by the full Assembly would give that body subpoena power in an effort to force officials to testify at hearings.

It also prompted the Legislature to pass and send to Gov. Chris Christie a bill, A3614, requiring the administration to get legislative approval before entering into a private lottery contract, though it was clear the governor who proposed the privatization would not likely sign such a measure.

The Assembly also passed a resolution, AR130, urging Christie to ask federal justice officials if the privatization contract is legal prior to signing it. Democrats and Hahn have questioned whether the contract would pass muster with the U.S. Department of Justice, which issued a memorandum in 2008 outlining the circumstances under which lottery operations could be operated privately.

“It’s disappointing to see Gov. Christie moving forward with a plan that has never been explained publicly, despite our invitations to do so,” said Assembly Budget Committee Chairman Vincent Prieto (D-Hudson). “The Christie administration is now set to forfeit substantial long-term revenue for a one-shot payment while also hurting small business owners.” The business owners have warned they could lose revenues, forcing layoffs or store closures, if the contractor moves to sell tickets online, which is one option the RFP allowed a contractor to take.

“The fact that Gov. Christie plans to give the contract to the only bid that was submitted only increases my concern,” Prieto continued. “This casts further doubt on whether this is a smart move. How do we know we are getting the best deal if we have nothing to compare it to?”

The contract has not been released publicly yet, but the RFP had outlined a complex set of revenue goals and payments, with incentives for the contractor to increase lottery sales and penalties if sales do not meet targets.

According to the release put out by treasury officials on Friday afternoon, the contract terms guarantee the state a minimum amount of income. Northstar has committed to generating at least $1.42 billion of total additional net income for the state over the life of the contract with a potential actual increase in net income of $6.88 billion.

Previously, administration officials estimated the firm could make $1 billion over the life of the contract. New Jersey would have to continue to get at least 30 percent of the total revenues from ticket sales as required by law.

A release from Lottomatica Group, the Italian company of which GTECH is a subsidiary, stated that Northstar projects an annual growth rate of 6.07 percent over the first five years of the contract, generating an average of $1.18 billion annually in net income for the state. That would represent an annual increase of $211 million, or more than $1 billion over the initial five year period compared with the state’s forecasts of growth without privatization.

Carole Hedinger, executive director of the New Jersey Lottery, said in the release that the contract will immediately strengthen its operations.

“Their business plan for the Lottery is solid, well-researched and builds upon our existing strengths,” she said. “GTECH and Scientific Games have outstanding records of success in helping public lotteries grow their revenues and improve their operations.”

But last month, Illinois Lottery officials announced a $20 million penalty is owed by Northstar Lottery Group LLC, the consortium between GTECH and Scientific Games that manages the state lottery there, for failing to meet its profit targets for the year that ended June 30, according to a report in Crain’s Chicago Business. The report stated that during Northstar’s first full year of operations in Illinois, the lottery generated a record $757 million in net income, but that was $94 million short of what Northstar had promised. The dispute had been before a mediator last fall and the outcome is unclear, but Crain’s reported that Illinois officials were planning to withhold payments to Northstar in order to collect the $20 million.

GTECH and Scientific Games both have other, unrelated contracts with the New Jersey Lottery.

Lottomatica’s release said that it expected the contract between the state and Northstar would be signed within 60 days.

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NJ Spotlight, an independent online news service on issues critical to New Jersey, makes its in-depth reporting available to NewsWorks.