March 22, 2013

Illinois Lottery Fines Northstar Group $20m For Missing Revenue Target

New Jersey is currently contemplating privatizing the management of its state lottery, which posted a record $2.7b in sales in 2012 and is the state’s fourth largest revenue stream. Gov. Chris Christie has been accused of exercising unnecessary secrecy in his privatization plans, so on Monday a suspicious state Senate passed legislation requiring both houses of the state legislature to sign off on any contract Christie might strike with lottery operators.

It’s not clear whether Christie will be willing to sign the bill and thus surrender his autonomy, but perhaps it would be better than to have the contract ripped up after the fact, similar to what happened recently in neighboring Pennsylvania. State treasury officials insist Christie would have the power to cancel the 15-year, $120m contract at any time should the operator prove incapable of increasing lottery revenue for two years. (This is what we call foreshadowing.)

As in Pennsylvania, there has been just one bidder for the New Jersey lottery contract, a consortium of GTECH, Scientific Games (SGMS) and a Canadian pension fund called OMERS, all of which is grouped under the banner of Northstar New Jersey. Northstar is also the name of the joint venture GTECH and SGMS entered into to operate the Illinois Lottery. Illinois was the first state to privatize management of its lottery in 2011, but the venture has yet to live up to its advance billing.

True, the Illinois Lottery increased sales from $2.27b to $2.68b and earned record revenue of $757m in 2012, the first full year of the 10-year Northstar contract, but that was $94m short of its promised $851.2m revenue target. Northstar quibbled about the revenue target figure, eventually convincing the state to reduce it to $822.8m, but that still left Northstar down nearly $66m. Northstar is also arguing that its total revenue tally was closer to $781m, but even that would leave it nearly $42m shy of its goal. (Nice try, guys, but unless you’re willing to claw back the odd jackpot or two, the two ends of this rope ain’t ever gonna meet.) As such, the Illinois Lottery Department is preparing to withhold monthly payments to Northstar until it has recouped a $20m penalty as stipulated under the terms of the management contract. Northstar earned $85m in management fees last year.

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