Friday, December 19, 2014

Quietly, some say secretly, Christie close to privatizing the lottery

In today's paper, I wrote this piece about Christie's efforts to privatize the lottery:

Quietly, some say secretly, Christie close to privatizing the lottery

In today's paper, I wrote this piece about Christie's efforts to privatize the lottery:

TRENTON - Gov. Christie hasn't held a news conference about it, and his treasurer has refused to testify on it. But the Republican governor is close to privatizing the bulk of a $2.8 billion New Jersey institution.

Following a national trend already under way in Pennsylvania, Christie is negotiating a 15-year contract with a company to operate the state lottery in an effort to increase sales, thereby building more revenue for schools and state institutions.

Like Pennsylvania's Republican Gov. Corbett, Christie bypassed the Legislature, much to its chagrin, in bidding out the system. And like Pennsylvania, New Jersey got just one bid in response to its request for proposals.

Unlike in Pennsylvania, where the pending contract was ultimately posted online and must be submitted for approval to the Democratic attorney general, New Jersey's lottery bid is not public. Christie could just sign a contract in the next two months.

That has prompted Democrats to serve up a familiar complaint: Christie is acting unilaterally and risking lawsuits because the privatization may be unconstitutional.

Meanwhile, the Communications Workers of America, the union representing lottery employees who may be laid off, has warned that private companies could increase sales by preying on gambling addicts and opening terminals next to welfare offices.

"It's just a bad deal from beginning to end and has all kinds of consequences," said Assemblyman Patrick Diegnan (D., Middlesex), who has introduced a bill that would require the Legislature to review the proposal.

The outline of the administration's plan is public, but the contract is being negotiated behind closed doors, where the terms could change.

This much is known: As per state law and the state Constitution, New Jersey would still own the lottery, and at least 30 percent of lottery revenue - nearly $1 billion last year - would still go to public schools and state institutions.

The vendor would be expected to expand to more chain stores, which has drawn opposition from owners of convenience stores and gas stations, which rely on traffic from lottery sales to sell other products. The vendor also may sell lottery tickets on the Internet and begin player loyalty programs.

Christie could turn down the company's bid and solicit others. Or he could scrap the plan. The state has already spent $935,000 on privatization consulting services from Macquarie Group, according to the Department of Treasury, plus more on an outside law firm.

"We don't know if we're going to accept the deal that's on the table now," Christie said last week in a rare comment on the issue during a radio call-in show.

But if he does accept it, lottery players wouldn't be affected "in the least," he said, declaring that there was no downside. He emphasized that the current Lottery Commission of gubernatorial appointees would still oversee operations, and that the company would make money only if it improved the business.

The company would be expected to set a revenue target above what the lottery pulls in now, and would share in those proceeds. Failure to meet targets would force the company to pay a penalty to the state, and if it missed projections two years in a row, it could lose the contract, officials said.

The company must make a $120 million deposit this year to cover costs for failing to meet projections, and the state already has budgeted most of that money - meaning the deficit would deepen unless the contract is signed.

But how difficult would it be to meet the target? Lottery revenue increases each year - documents show a 26 percent spike in contributions to the state from 2002 to 2012. Under the terms outlined in the request for proposals, though, the company would get a cut for increasing income just 9.2 percent over 10 years.

Ellen Dannin, a law professor at Pennsylvania State University who has studied government privatization, warned that such contracts often are filled with hidden costs, and that a long-term contract for a single vendor eliminates competition.

"Why is a monopolistic company better than a monopolistic government service?" she asked. Having multiple companies forming a partnership to bid for the service - as in New Jersey's situation - only strengthens that monopoly, she said.

Dannin also questions whether the new private service would be subject to government transparency and open-records laws.

"You have this entity that has no accountability mechanisms," she said. "Everything has gone into this black box and the people can't know."

A similar arrangement has caused turmoil in Illinois, which became the first state to privatize its lottery in 2010 despite criticism that the decision was made in secret.

The consortium bidding to take over the New Jersey lottery, Northstar, also runs the Illinois system. Although Northstar increased revenue in its first year, it fell short of projections and accused the state of interference, according to published reports. It demanded money from the state, but an arbitrator ruled the company had to pay the state.

Two entities in the Northstar group already have subcontracts with the Garden State: Scientific Games is in charge of printing instant lottery tickets, and GTECH runs the network of ticket terminals. If the companies are chosen to operate the whole lottery, critics say, they would be managing themselves.

Department of Treasury spokesman Bill Quinn said that wouldn't be a problem because "any contract would still be managed by the state government lottery staff and commission."

Still, Assemblyman Vincent Prieto (D., Hudson), chairman of the budget committee, argued that if privatization was such a great thing, state Treasurer Andrew Sidamon-Eristoff would have accepted one of two invitations to testify before his committee.

Another hearing is scheduled for Monday, but the treasurer won't appear. It would be "inappropriate to testify while procurement is still in process," Quinn said.

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