Pennsylvania is on the verge of becoming the third state to privatize its lottery system.
Camelot Global Services Ltd., which manages Britain's lottery, would pay $34 billion over 20 years to run Pennsylvania's, according to a notice of award that Gov. Tom Corbett announced Friday. While not a binding contract, a notice of award is a major step in that direction.
Several state officials, including Attorney General Kathleen Kane, who took office on Tuesday, must sign off on the deal.
Treasurer Rob McCord has questioned the legality of the move. In a letter to revenue Secretary Dan Meuser late last month, McCord said Camelot's promise to increase lottery proceeds hinges largely on an expansion into new types of games that McCord said might need legislative approval.
Some Democratic leaders lambasted Corbett's administration for moving too quickly on privatization.
"We have the best run lottery in the country. We have set record profits last year. So you have to ask yourself, 'Why are we doing this?'" said House Democratic Leader Frank Dermody of Oakmont. The Legislature is controlled by the GOP, and Corbett is a Republican.
Illinois and Indiana and have already privatized their lotteries.
"From a purely economic standpoint, privatization in Pennsylvania is good for most state services. The governor is picking which services will cause the least disruption when moving from the public sector to the private sector," said David Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township, Pa.
"He has gone as far as possible with breaking up the Liquor Control Board and now the next service in line is the lottery system, which will affect approximately 200 employees. The only downside is the state employees will lose their jobs if they are not absorbed into other departments."
Credit rating agencies, according to Fiorenza, tend to look at the success of privatizing services on a case-by-case basis.
Fitch Ratings assigns an AA-plus rating to Pennsylvania's general obligation bonds, while Moody's Investors Service and Standard & Poor's rate them Aa2 and AA, respectively.
Meuser, speaking to reporters after a four-hour state Senate hearing in Harrisburg on Monday, cited the need to secure long-term funding for elderly-related services. Only Pennsylvania, which began its lottery in 1972, designates all related proceeds for elderly programs, which include at-home meals, prescription drug benefits and property tax rebates.
"We saw the importance of managing the lottery for the future. We have continued demand for increased needs today, five years from now and further. What we saw today was a very credible plan," Meuser said.
Under the agreement, Camelot has promised to maintain a $150 million fund to tap into if revenues fall short of projections. In Illinois, an independent mediator made a preliminary ruling in September that Northstar Lottery Group LLC did not have to pay a $25 million penalty for missing contract targets because the state's cutbacks in advertising and marketing hindered the company.
"Where they have privatized the lottery in Illinois, it has been a disaster," said Dermody.
Northstar is a joint venture of Scientific Games Corp. of New York and GTech Corp. of Providence, R.I., the latter a wholly owned subsidiary of Italy's Lottomatica SpA. In Indiana, Hoosier Lottery officials last fall signed a 15-year agreement to have GTech run its lottery.
"Most of the private companies that operate lotteries are not from the U.S.," said Fiorenza.
Council 13 of the American Federation of State, County and Municipal Employees, the union representing lottery employees, had submitted an 11th-hour competing plan against Camelot's, prompting a brief delay in the bid process.