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Interactive Map: NJ Lottery Ticket Sales Set Record, But Profits Fall Short

New contractor misses revenue target by $100M, raising concerns and prompting calls for investigations

New Jersey's decision to partially privatize some lottery functions was controversial two years ago when the state entered into an agreement with Northstar New Jersey -- and it remains so in the wake of reports that the company may have missed its income targets again.

Total lottery ticket sales rose to record levels in the 2015 fiscal year, according to state lottery officials. But at the same time, the New Jersey Lottery missed its revenue target by more than $100 million, said Assemblyman Gary Schaer (D-Passaic), chairman of the Assembly Budget Committee, who plans to hold a hearing on the issue later this fall.

Many Democrats in the Legislature, as well as union officials, opposed the decision by the Christie administration to turn over advertising and sales functions -- "growth-management services," according to the lottery's most recent annual report -- to a private contractor. Northstar began its 15-year contract with the state on October 1, 2013.

The disappointing results were not surprising to the Communications Workers of America, which noted, when New Jersey awarded its contract in Spring 2013, that a similar consortium of firms was having trouble in Illinois. That state severed its contract last year after its Northstar group failed to meet its projected profits in its three years in operation.

According to the New Jersey Lottery's 2014 report, Northstar fell $55 million short of its projected $761 million net income target for the nine months in which it handled sales and advertising functions in the 2014 fiscal year. Its contract calls for Northstar to pay penalties for missing its targets and the company was assessed a reduced $14.1 million penalty as a result, although it did not have to pay any additional money to the state because the penalty was covered by some of the $120 million Northstar had paid the state in 2013. It can use about another $6 million of that money to help defray any potential penalty for the 2015 fiscal year.

Schaer said the company's shortfall for that year adds up to $107 million, although the terms of its contract with the state will likely let Northstar pay less -- any potential penalty is capped at 2 percent of net lottery income.

The news that Northstar again missed its target at first seems incongruous given that the state announced in July that the Lottery achieved record sales of more than $3 billion in the 2015 fiscal year.

In that announcement, Carole Hedinger, New Jersey Lottery Executive Director, attributed the increased sales to "product innovation, expansion of our public engagement, an increased retailer base, refreshed advertising, and internal and external technological efficiencies.”

Schaer said Northstar charged the state $29 million in fees and expenses last year, for a total of $45 million in administrative costs, the highest since at least 2008, which diminished profits.

"In the case of Northstar's takeover of the lottery, the administration failed to take any action to protect taxpayers," Schaer said. "It has aided and abetted Northstar's failure by continuously lowering revenue targets. Making excuses does nothing to protect our bottom line."

State Auditor Stephen Ells also noted Northstar's poor performance. In a report last February, he suggested lottery officials "should continue to monitor performance to determine if the Northstar contract benefits the state."

The lottery's audited report for the last fiscal year is not yet complete, but the 2014 report shows that total operating expenses were almost $90 million higher that year than in FY 2013, leading to a $6 million decline in operating income to $956 million. Still, the state transferred $965 million -- or 34 percent of sales -- from the lottery into the budget to cover the programs that the lottery has traditionally helped fund, including aid to colleges, Tuition Aid Grants to college students , and the operation of state psychiatric hospitals and developmental centers.

By law, at least 30 percent of lottery proceeds must fund those and other designated programs. Christopher Santarelli, a Treasury spokesman, said it's unclear how much will be transferred this year.

"We won't know how much will be transferred for FY15 until the audit is completed," he said.

However, the July press release issued by the lottery indicated 31 percent of money from sales would go toward programs, which would total about $930 million. If that winds up being the case, it would mark the smallest dollar amount transferred since FY 2011 and the smallest percentage of sales transferred since at least FY 2008.

Santarelli described Northstar's work for the state as a "partnership," and said the group had "invested millions of dollars in technology personnel and expanding the Lottery retailer network by more than 850 locations." Still, the state will not hesitate to collect the penalties for underperformance according to the terms of the contract.

"It will again face a penalty if it fails to meet financial targets that it agreed to under the contract," he said.

That assurance was not enough to appease Schaer.

"We need a thorough and in depth to determine why they are not living up to their end of the bargain and what, if anything, can be done to improve performance," said Schaer. "Rather than find ourselves next year in a similarly precarious position for a third time and let history repeat itself, we must take action now to better understand the clear and obvious failings of the Northstar contract. The taxpayers of this state deserve nothing less."

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