New Lottery Agreement Could Earn State $100M Over Coming Decade

John Reitmeyer | May 16, 2019 | Budget
Public-employee pensions are real winners. They should see extra $10 million annually over next 10 years

lottery mega millions
Saving $100 million over the next decade isn’t a matter of luck, even if it involves the state Lottery and outside vendor Northstar New Jersey. The projected jackpot comes courtesy of an amended service agreement that boosts the annual performance targets the vendor must meet to earn incentive payments, according to the Department of Treasury.

The new agreement, which was enacted earlier this month, was one of several topics taken up at yesterday’s Assembly Budget Committee. It also takes taxpayers off the hook for funding “personnel travel, meals, and entertainment” expenses for Northstar’s managers, Treasury officials said.

The savings will directly benefit the public-employee pension system because a 2017 law funnels all Lottery revenues into the worker-retirement funds as part of a broader effort to address the state’s chronic underfunding of the pension system.

A cut of the profits

The long-term privatization deal with Northstar was reached in 2013 during the tenure of former Republican Gov. Chris Christie. It called for the company to handle sales and marketing duties for the Lottery in exchange for a cut of the proceeds through 2029.

But the deal drew heavy criticism from Democrats who control the Legislature, especially after a 2015 contract amendment lowered the targets for Northstar’s performance-based incentive payments. It was also questioned by officials from the Communications Workers of America, the labor union that represented dozens of employees who lost their jobs as a result of the privatization.

Credit: Sarah Yenesel
State Treasurer Elizabeth Maher Muoio before Wednesday's budget hearing
After Murphy, a Democrat, took office in early 2018, Treasury officials began a review of the terms of the contract to address concerns that “taxpayers were not fully benefitting from the launch of new games and from the contract as a whole,” said Treasurer Elizabeth Maher Muoio. It was that review that led to the new service agreement reached on May 3, she said.

“We found the previous amendment to be egregious in that even if Northstar did little to nothing to boost sales, they were still entitled to an extremely generous incentive payment,” Muoio said.

New game of chance

Several key developments have occurred since the Christie administration amended the contract in 2015, including the restructuring of Powerball and Mega Millions and the launching of a new game called Quick Draw. That let Northstar qualify for incentive payments worth roughly $30 million during the past three fiscal years, Treasury said.

The changes made in the service agreement will make it harder for the vendor to qualify for the annual performance-based incentive payments through the remaining life of the contract.

The amended deal also addresses concerns about taxpayers funding expenses for company managers included in the original contract. Management bonuses and expenses related to meals, travel, and entertainment will now come out of Northstar’s own funds, Treasury said.

Northstar officials could not be reached for comment on the contract amendments yesterday, but Muoio said they will do “far more to protect the taxpayers of this state, and our pension system.”

During yesterday’s Assembly Budget Committee hearing in Trenton, which marked Muoio’s final appearance before lawmakers in advance of the June 30 deadline for a state budget, Chair Eliana Pintor Marin asked if the projected savings could also have a direct impact on the state budget, since money from the Lottery only covers a portion of the total contribution the state makes into the pension system each year.

But Muoio said the new agreement would only directly benefit the pension system, as the savings would go right into the retirement funds.

“It’s roughly $10 million a year,” Muoio said. “It’s less money that’s going to Northstar for expenses and incentive payments over the course of the contract.”

Minimal effect on actuarial math

Assemblyman Dan Benson (D-Mercer) also asked if the new deal would have any effect on the state’s push to ramp up annual pension contributions and bring the retirement funds back to good health after years of underfunding. But Treasury officials suggested it would not directly influence the ramp-up schedule or lower what the state has to pay, since the impact on the long-term actuarial math would be minimal.

Under Murphy’s budget proposal for fiscal year 2020, the total pension contribution will rise to $3.8 billion, which is roughly 70 percent of the total amount the state should be contributing, according to actuaries. The state is on course right now to make a full pension payment in fiscal 2023.

“So this really is extra money (going) into the pension, not just reducing the amount that we have to put in,” Benson said.

After the hearing, Pintor Marin said the budget process now shifts to the phase that will see lawmakers come up with an appropriations bill to send back to Murphy by the June 30 deadline.

“The most important thing that we will be doing in the next couple of weeks is making sure that we have a fair and responsible budget, that we have a budget that really funds a lot of our priorities, with regards to transportation, education, and making sure that key items that we as Democrats believe in are incorporated into this budget,” she said.