New Jersey Signs Lottery Privatization Contract

New Jersey Signs Lottery Privatization Contract
June 24, 2013

Leonard Gilroy

Leonard Gilroy is director of government reform at Reason Foundation. (read full bio)

New Jersey has become the third state—after Illinois and Indiana—to privatize the management of its state lottery. Under the 15-year contact, a private manager will take over the lottery’s marketing and sales functions in exchange for an upfront payment of $120 million and a contractual commitment to generate more than $1.42 billion in additional net income for the state, relative to in-house operation.

The agreement was finalized on June 21 after a state appellate court rejected a request the previous week for a stay of the contract made by a public employee union.

In April, Gov. Chris Christie's administration issued a notice of intent to award a 15-year contract to Northstar New Jersey Lottery Group—a joint venture of GTECH Corporation, Scientific Games, and the Ontario Municipal Employees Retirement System—to take over the lottery’s marketing and sales functions in exchange for the $120 million upfront payment (the first upfront payment among the three lottery deals thus far) and the commitment to increase net lottery income to the state over the life of the contract.

Northstar will take over the lottery’s marketing and sales functions in October, and the state will retain control over security, licensing, auditing, and prize payments. Layoffs are not expected, as state officials have noted current lottery employees affected by the privatization would either be offered an interview with Northstar—which plans to significantly increase the sales staff—or reassigned to other state positions.

Union Tries to Stop Deal

Despite such assurances, the Communication Workers of America (CWA)—the largest union representing state government workers in New Jersey—and some legislative Democrats have made several attempts to stop the deal from moving forward.

In early May, Christie vetoed legislation (A3614) passed in the 2013 session that would have required prior legislative approval before the contract could proceed. That same month the state rejected a formal protest against the deal filed by the CWA claiming it ran afoul of state law. The state countered that the privatization did not violate state law because the state was only outsourcing marketing and sales functions, not relinquishing full ownership of the lottery. After that setback, the CWA filed its appeal in court to block the deal in June.

Though the appellate court has rejected a stay of the contract—noting the CWA failed to demonstrate that allowing the deal to proceed would bring “irreparable harm”—it has yet to issue a final ruling on the union’s appeal.

Federal Law Sets Parameters

In addition to claiming the deal would violate a state law requiring state ownership of the lottery (which would not undergo an ownership transfer under the deal), the union also claims the deal would violate federal law. Presumably this refers to an October 2008 advisory opinion issued by the U.S. Department of Justice that found that states would not be in compliance with federal law if they were to enter into long-term leases of their lotteries with private consortia in which companies were given primary control of business decisions and revenue streams. The DOJ ruling found that although states may contract with private firms to operate their lotteries, federal law requires that states maintain control over significant business decisions and private management firms may not receive more than a “de minimus interest in the profits and losses” of the lottery enterprise.

This ruling helped shape the subsequent private management agreements for the Illinois Lottery (signed in 2011) and Indiana’s Hoosier Lottery (signed in 2012). In those deals, the state retains full control and oversight over the private manager’s business decisions, and the private manager’s revenues are capped. The New Jersey deal includes a provision similar to Illinois’ that places a cap on the potential profits for the contractor at 5 percent of total net income, which is clearly aimed at compliance with the “de minimus” aspect of the DOJ ruling.

Given these aspects of the deal structure—and the fact that two other states have already signed similar private management contracts for their lotteries over the last two years—it is unlikely the New Jersey deal will be struck down on federal grounds. The USDOJ’s silence thus far speaks volumes, as it has not responded to a request for a review of the legality of the deal made by several New Jersey legislators back in April.

New Jersey is not the only state that has recently navigated opposition to a lottery management contract. In Pennsylvania, Gov. Tom Corbett’s administration is in the process of renegotiating a proposed lottery management contract with Camelot, the private operator of the United Kingdom’s national lottery, after the state’s attorney general rejected the agreement back in February over several legal concerns.

Leonard Gilroy (Leonard.gilroy@reason.org) is director of government reform at Reason Foundation. Reprinted with permission of reason.org.

Leonard Gilroy

Leonard Gilroy is director of government reform at Reason Foundation. (read full bio)