Bloomberg News

Christie Pushes Private Lottery as Bidder Misses Targets

January 31, 2013

New Jersey Governor Chris Christie

New Jersey Governor Chris Christie laughs while speaking with reporters at the Statehouse in Trenton, New Jersey. Photographer: Emile Wamsteker/Bloomberg

Governor Chris Christie says turning over New Jersey’s lottery to a private manager would boost sales, even though there’s scant evidence to support his position.

The Republican is reviewing the one bid his administration received from a group that includes Gtech Corp., a company that helps run the lottery in Illinois, where revenue has missed goals. Though New Jersey had a record $2.7 billion in lottery sales in fiscal 2012, Christie says a private company can do better.

Christie joins U.S. governors, including those in Ohio and Pennsylvania, who are seeking private investors to maximize returns from public assets. Illinois was the first to privatize its lottery, in 2010. Indiana and Pennsylvania have followed, even as critics complain about a small pool of bidders and worry about the fate of lottery-funded state programs.

“There are simply not enough firms that have any expertise running these things,” said Victor Matheson, an economics professor who studies gaming at College of the Holy Cross in Boston. “It’s not like private companies have some magic wand to wave and make things better.”

Illinois awarded lottery management to Northstar Lottery Group, a partnership of Gtech, a Rhode Island subsidiary of Italy’s Lottomatica Group SpA (LTO); Scientific Games Corp. (SGMS:US) of New York; and Energy BBDO, a Chicago ad agency. The group guaranteed a profit level for each of the first five years of the agreement.

Missed Goal

Though Northstar collected a record $726 million in its first year, that was about $100 million short of the minimum promised, according to an analysis by the Chicago Tribune. An arbitrator in November sided with Northstar in a complaint that attributed the shortfall to state decisions on contracting and marketing.

Mike Lang, a spokesman for the Illinois lottery, said the revenue figures cited by the Tribune are preliminary and declined to confirm them.

In New Jersey, Northstar teamed with the Ontario Municipal Employees Retirement System to submit a bid in December. State treasury officials say a decision should be made next month.

“Privatization is the right way to go,” Christie, 50, told reporters in East Newark yesterday. “We’re now going to negotiation with that bidder and see if we can come to an agreement that we think is in the best interest of the people of this state. If we do, we’ll come to an agreement and if we don’t, we won’t.”

At risk is New Jersey’s fourth-largest revenue source, an almost 42-year cash stream that grew even as Christie missed wider annual revenue targets. In the fiscal year ended June 30, $950 million of the lottery’s sales funded state programs, including veterans homes, psychiatric hospitals and school scholarships.

One Each

New Jersey and Pennsylvania both requested proposals in the past year for lottery management. Early interest in the contracts fell off, and each state drew just one bidder.

In Pennsylvania, Republican Governor Tom Corbett last month handed a 20-year contract for management of the state’s $3.48 billion lottery to Camelot Global Services PA, which is part of U.K.-based Camelot Group Plc, the company that runs Britain’s National Lottery.

Camelot guaranteed $34 billion in profits over 20 years, which exceeded projections under state management by $3 billion to $4 billion, Corbett said.

Killing Goose

Christie and Corbett are both moving ahead amid opposition from Democratic lawmakers and unions representing lottery workers. In New Jersey, the Communications Workers of America says 60 public workers would lose their jobs.

“Giving the lottery to a private vendor is like killing the goose that laid the golden egg,” said New Jersey Assemblyman Patrick Diegnan Jr. “It’s difficult to rationalize privatization under any circumstances, but it would be irresponsible to go forward with an award when only one bid was submitted.”

Diegnan, of South Plainfield, is part of a group of Democrats sponsoring a bill that would require lawmakers’ approval of any private lottery-management proposal. His party controls both houses of the legislature, which has no power to stop Christie from signing a contract.

Gtech controls 80 percent of the Illinois lottery partnership. Its stake in Northstar New Jersey and other proposal details are confidential while the contract is under review, said Robert Vincent, a Gtech spokesman.

New Jersey’s request for proposals stipulated that its contract would be for 15 years, and would require an up-front payment of $120 million from the manager. That condition limited the bidding pool, Vincent said.

“Certain companies may not have the financial wherewithal,” Vincent said.

Public Input

Illinois and Indiana, which last year hired Gtech to manage its lottery, didn’t ask for upfront money, said Alex Kovach, president of Camelot PA. Pennsylvania demanded $200 million.

“That makes for responsible bidding,” Kovach said during a Jan. 14 Senate public hearing in Pennsylvania on the bid.

No such hearings are being held in New Jersey, much to the chagrin of Democratic lawmakers.

“The proposal to privatize without public explanation one of our most profitable and well-run assets is troubling,” said Assembly budget chairman Vincent Prieto. “The Christie administration appears ready to forfeit substantial long-term revenue for a one-shot payment that will also hurt small business owners and risk vital programs.”

Internet Sales

Bakulesh Patel, who owns the Pantry Farms convenience store in Ewing, New Jersey, said he is concerned that a contractor would offer ticket sales on the Internet. Illinois was the first state to legalize such vending, part of Northstar’s strategy to draw new players.

“It’s almost 75 to 80 percent of customers coming in for the lottery,” Patel, 51, from Piscataway, said in an interview. He counted on such revenue, including 5 percent of sales and a percentage of winning tickets he sells, as part of his business strategy when he opened two-and-a-half years ago, he said.

A poster on the door hails Pantry Farms as a “Lucky Lottery Store” after a Cash 5 player there hit the $142,189 jackpot. Patel’s share of that was $750.

To contact the reporter on this story: Elise Young in Trenton at eyoung30@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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Companies Mentioned

  • SGMS
    (Scientific Games Corp)
    • $9.96 USD
    • 1.42
    • 14.26%
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