The Christie administration hasn't announced it yet, but its plan to privatize New Jersey's $2.8 billion lottery has raised a hue and cry across the state.
The state treasurer's office has issued a request for proposal (RFP) that covers several components of the lottery -- including game development, ticket supplies, marketing and advertising, and maintenance of the central gaming system.
Small-business owners and public workers are allied in opposing the plan, which they say could endanger the jobs of nearly half the state’s lottery workers and hurt sales revenues at thousands of stores that sell lottery tickets.
And Democratic legislators have added their voices to the din.
“We have to stop this plan. Right now, it is a runaway train,” Assemblyman Patrick Diegnan (D-Middlesex) told about 50 business owners and union members who attended a rally in Edison Wednesday night.
Meanwhile, Sen. Barbara Buono (D-Middlesex) said she has asked the Legislature’s counsel for an opinion on whether the RFP was constitutional. The proposal provides incentive payments to a contractor exceeding net income targets, but Buono said the state constitution requires that all lottery proceeds fund education and state institutions.
The state has set a revised deadline of December 11 to receive bids. Under the terms of the RFP, New Jersey would get an upfront payment of $120 million, termed an accelerated guarantee payment, and at least 30 percent of total revenues from ticket sales to fund state institutions and education, as required by statute.
“Placing a private entity at the head of the lottery is not something that should be done lightly," Buono admonished, "particularly when the proposal calls for tens of millions of dollars in lottery money to be paid in incentives to a private firm, rather than going to their intended use of supporting education and state institutions,” she said.
William Quinn, a treasury department spokesman, said state statute requires that 30 percent of lottery revenues go to those purposes and in the fiscal year that ended June 30, $950 million, or 34 percent of total revenues funded state institutions. The RFP guarantees that the state continue to get at least that 30 percent of income but gives the contractor a share of any increased income “based on performance,” to a maximum of 5 percent of net income in any year. And should sales not meet specified targets, the contractor would be responsible for making up a portion of the difference, to a maximum of 3.8 percent of net income in any year.
Quinn said the purpose of the RFP is to find a manager to grow lottery revenues and that the program is not a privatization, since the state will continue to own the lottery, conduct the drawings, and oversee the program.
“We are trying to expand the whole pot,” he said. “If we expand the total, it will expand the amount available to the state.”
But the state is not considering the effect this could have on small business owners, said several retailers who attended Wednesday night’s rally, co-sponsored by the Asian American Retailers Association and Communications Workers of America. Representatives of both groups urged members to call Gov. Chris Christie to express their opposition and gather signatures on petitions to oppose to plan.
“Our industry is under attack,” said Satish Poondi, who handles legislative affairs for AARA. “These are your businesses that you built. The resale value would go down right away.”
He estimated that small retailers could lose as much as a third of their lottery sales revenues in just the first year, not including the ripple effect from the losses of income from other items -- such as coffee, chips and soda -- that lottery players purchase while in the store buying tickets. The losses would result from a contractor favoring big box and chain stores and expand sales to the Internet, making it unnecessary for players to go to the local convenience store to buy tickets.
The RFP states that the winning bidder “may, under the supervision of the Division of Lottery, have the opportunity to design and implement Internet sales channels for lottery products.”
H.R. Shah, AARA’s former chairman and head of the Krauszer’s convenience store chain, said that for each small business, roughly three jobs could be in jeopardy due to lost revenue.
“The lottery’s the main thing,” he said. “We have to find a solution and fight for that.”
Quinn said there is no evidence that using a private contractor will hurt small businesses.
New Jersey currently has about 6,500 lottery sellers, with an eye toward increasing that number to 6,700. The vendors receive a 5 percent commission on sales.
“It’s possible some of the things they [the contractors] do will help the retailers,” Quinn said. “We are expecting more outlets, more games.”
An estimated 62 lottery workers who handle marketing and sales functions could be affected by the move, Quinn said. But reducing the size of the state’s workforce is not the main goal of the plan, since that would provide a relatively small amount of savings. Only 1 percent of lottery income goes to administration.
Quinn said the winning bidder would be required to interview and considers all current lottery employees who apply for a position and the state has “made a commitment that every effort will be made to find alternate positions” within the lottery or elsewhere in state government for those who do not get a job with the contractor.
Seth Hahn, New Jersey legislative and political coordinator for the CWA, said if state officials looked at Illinois, the first state to privatize its lottery, they would find numerous reasons why they should not even enter into a 15-year contract.
The company that won the contract for Illinois’ lottery did not meet its revenue projections for its first year of operations, launching the contractor and the state into a battle over whether the company would have to pay penalties for failing to meet its projection. Buono said the sides are in arbitration over the issue.
Quinn said New Jersey’s RFP is clear in spelling out penalties and notes the state can terminate its contract if the manager falls short of its targets two years in a row. He also noted that the contractor did increase lottery revenues in Illinois in its first year, just not by the amount it promised.
New Jersey’s lottery is one of the most lucrative in the nation, according to the RFP, with the 8th largest total sales in the nation and the fifth-highest per capita -- about $300 per person in the 2011 fiscal year.
According to Diegnan, “To sell this asset off for a one-time budget revenue generator is simply bizarre.”
But Quinn said lottery officials are looking to boost sales among young people.
Buono said legislators held hearings several years ago on the issue of privatizing the lottery and rejected the idea.
“In the end, we decided our lottery worked just fine; it is run so efficiently and such a small percentage is used for administration,” she said.
Buono questioned why the Christie administration took this action without fanfare and said legislators did not even know that the RFP have been put out.
“For an administration that prides itself on transparency, this is as opaque as mud,” she said. “This is a bad deal all around, for the people, for small businesses and for the budget, because after we get the one-time payment, we’ll have 5 percent of the income siphoned off."
Diegnan told his audience that the Assembly Budget Committee would be holding a hearing on the proposal on December 5 and urged them to attend to discuss the consequences of lottery privatization on their businesses.
Buono said she would press for a similar hearing in the Senate.