Illinois Governor Picks Private Firm to Manage Lottery

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CHICAGO — Illinois Gov. Pat Quinn Wednesday announced the selection of Northstar Lottery Group to privately manage and expand the Illinois Lottery. The deal is expected to raise $1.1 billion over the next five years for education and to repay bonds issued to support the state’s $31 billion capital program.

“I think this is the prudent course to take,” Quinn said after announcing the selection of Northstar over another bidder that sought to operate the Lottery in a first-of-its-kind contract. “Today’s announcement allows the Illinois Lottery to continue its crucial funding of our schools while increasing revenue for the Illinois Jobs Now program.”

Under the proposed contract that has not yet been finalized, the state would retain ownership and control over the Lottery but day-to-day operations and expansion plans would be managed by Northstar beginning next year. 

The Lottery currently generates about $2 billion in sales, producing about $635 million in profits in fiscal 2009 that went to education. Northstar believes it can increase that sales figure by 10.6% annually over the next five years by expanding the Lottery’s offerings, bolstering the number of retail outlets to 13,000 from 7,500, expanding to Internet sales, and through improved marketing.

Northstar is a consortium made up of two gaming companies GTECH and Scientific Games — both current state lottery vendors — and the marketing and advertising firm Energy BBDO. The group will be paid $15 million annually under a proposed 10-year contract with bonuses tied to lottery revenue growth. The group also faces financial penalties if it fails to meet performance targets set in the contract.

“Northstar has the experience, knowledge and resources to be a responsible steward of the Illinois Lottery, bringing benefits to our players, retailers, and the state,” said Jodie Winnett, the Lottery’s acting superintendent.

The group beat Camelot Group of London, the operator of England’s lottery system. A third participant was eliminated from bidding earlier in the process. The state’s advisers on the privatization deal included the Chicago-based financial advisory firm Scott Balice Strategies, consultant Oliver Wyman, Christiansen Capital Advisors LLC, and Kroll, an investigative firm.

Under the Lottery privatization legislation signed by Quinn last December, additional lottery proceeds will first go to education. The amount must be increased annually at the rate of inflation from a base of $635 million. Additional revenues would then go to repay borrowing tied to the multi-year capital program known as Illinois Jobs Now.

The capital budget relies on a mix of local matching funds, federal grants and $19 billion in state borrowing. Debt service is to be repaid through transportation revenues and from additional revenue expected from the imposition of a series of taxes and fees that are supposed to generate between $943 million to $1.2 billion more annually, including $150 million from the Lottery privatization.

Other sources include statewide legalization and taxation of video poker at local establishments that is projected to raise $288 million to $534 million; expansion of the sales tax to cover candy, sweetened beverages and some hygiene products projected to raise $65 million; an increased per-gallon tax on beer, wine, and liquor that is supposed to raise $108 million; and increased license and vehicle fees that are expected to raise $332 million.

The status of some of the revenue streams is shaky. Dozens of communities have opted out of video poker and liquor industry representatives have filed a lawsuit challenging the legality of the alcohol tax because it is higher on spirits than beer.

In the event of a shortfall, Illinois would have to dip into its general fund to cover debt service as most of the borrowing tied to the capital budget carries the state’s full faith and credit pledge. Such a move would further strain the state as it already faces a liquidity and budget crisis.

Illinois faces a $12 billion to $13 billion deficit going into fiscal 2012. It closed out fiscal 2010 June 30 with roughly $6 billion in overdue bills. It has seen its GO rating fall several notches to the mid-to-high single A category.

Quinn and Winnett called the private management deal a first of its kind among states. The deal is an evolution of a plan first floated by former Gov. Rod Blagojevich in 2006 to lease the Lottery in hopes of raising an upfront payment worth billions. That plan ran into legislative opposition and ran afoul of federal laws that require states to retain majority control of their lottery operations.

State leaders have defended the effort to shift to private management, arguing that gambling is not a core function of state government and private operators are better equipped to manage a retail business like the Lottery.

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