Frustrated and Powerless, Committee Can Only Criticize Lottery Privatization

Colleen O'Dea | December 6, 2012 | More Issues
Administration pushes ahead with plan to outsource $2.8 billion NJ State Lottery

Despite the fact that they have no power to stop a plan to privatize the state lottery, some members of the Assembly Budget Committee yesterday expressed frustration that the Christie administration is seeking to outsource the sales and marketing of the $2.8 billion state lottery without consulting them.

It didn’t help that the lottery director declined to appear before the committee, instead sending a letter stating she was precluded from testifying on a pending RFP before providing two pages of answers to the biggest complaints about the plan.

“Privatization should be reserved for when the government cannot perform that function well on its own,” said Chairman Vincent Prieto (D-Hudson). “In the case of our award-winning lottery system, we have one of the most efficient operations in the world.”

A summary of observations from a report posted online as part of a December 2011 request for information (RFI) points out that the New Jersey lottery is one of the best performing in the nation — fifth in sales per capita — and had the highest net income margin in 2010.

The state put the RFP out in August and bids are due back on December 11 from a company seeking to manage certain lottery operations, including game development, ticket supplies, marketing and advertising, and maintenance of the central gaming system. New Jersey would get an upfront payment of $120 million from the contractor and at least 30 percent of total revenues from ticket sales to fund state institutions and education, as required by state statute.

“We appear to be looking at a plan to forfeit substantial long-term revenue for a one-shot upfront payment that will hurt small business owners and deprive us of considerable revenue to serve students, veterans and the disabled,” Prieto said.

But Seth Hahn, New Jersey legislative and political coordinator for the Communications Workers of America local that represents lottery workers, said the state might not even get to keep all $120 million. The way the RFP is structured, should the company not meet its revenue projections, or if the state seeks to get out of the 15-year contract, the vendor could get some or all of that $120 million back in penalties.

The administration’s estimate is that the winning bidder could net about $1 billion over the 15 years of the contract.

“Clearly this RFP is designed for the profit motive of the vendor,” said Assemblyman Daniel Benson (D-Mercer). “I am more concerned about small businesses; I’m concerned about New Jersey jobs, New Jersey small businesses.”

Republicans on the committee disagreed, saying it was about time the state investigate a better way to operate the lottery.

“It is incumbent upon government to look for new ways to do things better,” said Assemblyman Anthony M. Bucco (R-Morris). “This proposal is strictly performance-based. If the winning bidder doesn’t put up increased revenues, the state will always have the ability to terminate the contract . . . This is an idea worth exploring and I look forward to seeing whether it’s an avenue we should pursue to benefit taxpayers and students.”

State workers and small business owners say the plan will only benefit the winning bidder.

“I can say with certitude that if the lottery is privatized” there will be a greater call for Internet ticket sales, which will hurt sales of all kinds at convenience stores, said Sal Risalvato of the New Jersey Gasoline, Convenience, Automotive Association.

He said store owners get only 5 cents on every $1.00 lottery ticket, but the way they make money is on the profit from the sales of coffee, sandwiches and other items people buy while purchasing a lottery ticket.

“These small businesses, they rely on it,” Risalvato said. “They also pay sales tax. They employ people.”

“As far as sales, we do great with the lottery,” said Atul Patel, who owns a Trenton convenience store. “If we do not have the lottery, I will go out of business, guaranteed. If it goes online, that will be the biggest problem for us.”

Both the businessmen and Democrats complained that the RFP process has been, and remains, relatively secretive. No public hearings were held.

“It’s very important to have this hearing because there was not any public comment period,” said Satish Poondi, who handles legislative affairs for the Asian-American Retailers Association. “Let’s not rush, there needs to be economic feasibility studies about this.”

“I feel really hampered by not having the administration here,” said Assemblywoman Bonnie Watson-Coleman (D-Mercer). “It’s a one-shot gimmick that won’t fill a significant hole in our revenue shortfall. It makes no sense.”

But In her letter to Prieto, lottery director Carol Hedinger said the RFP is a result of more than 18 months of study and two previous public bidding opportunities, which led the lottery to retain Macquerie Capital to do an intensive review of the lottery’s operations and recommend contracting out marketing and sales functions to assure future revenue growth.

Hedinger also said that she did not appear to testify before the committee because “based on best practices for State contracting and well-established policies underlying State bidding and procurement laws, it would be inappropriate for me to comment on a pending RFP.”

The RFP’s purpose is to grow lottery revenues in the future, according to its text and treasury officials.

Privatizing marketing and sales would lead to the loss of roughly 63 of 130 state worker jobs with the lottery, according to Hahn. Although the RFP states the winning bidder should interview and consider hiring any laid-off workers, some don’t find that appealing, saying through their CWA representative that they would rather continue to work for the state and keep their state pension than possibly make more money in an incentive-based contract.

Awarding a private lottery contract would make New Jersey only the fourth state to transition over at least partially to private management. The oldest of those efforts, in Illinois, is currently in arbitration after the management firm did not meet expectations in the first year and is fighting to prevent having to pay the penalties specified in the contract.

“Given what we have seen in other states, this seems like a risky gamble,” Benson said. “I’m not sure why we are rushing so fast when other states seem to be stumbling.”

New Jersey’s RFP includes a complex formula of incentives for exceeding performance goals and penalties for missing them.

“We have a lot of questions but we don’t have enough answers,” Prieto said, adding lawmakers are studying whether they have any recourse against the plan.”