Privatization & Government Reform Newsletter

Pennsylvania Ends Procurement for Private Lottery Management

Initiative stalled amid union, attorney general opposition

All of the 44 states that operate lotteries currently outsource certain components of their internal lottery operations—including central data systems, lottery terminals, instant ticket printing and distribution, vending machines, and advertising—three states (Illinois, Indiana and New Jersey) have taken privatization further in recent years by entering into private management agreements (PMAs) with private service providers designed to increase net lottery revenues to the state as a means of augmenting traditional tax revenues.

Privatized lottery management took a different course in Pennsylvania, however, where last month Gov. Tom Corbett’s administration announced that it was abandoning a PMA negotiated the previous year that got stalled amid union and legislative opposition and a rejection of the contract by the state’s attorney general in early 2013.

In November 2012, the Corbett administration announced that it had received a bid that included 20 years of annual profit commitments from Camelot Global Services, an international lottery operator that currently operates the UK National Lottery and provides consulting services for several U.S. state lotteries. In return for a 20-year contract to manage day-to-day operations of the Pennsylvania Lottery, Camelot committed to increasing net lottery revenue to the state by a minimum of $34.6 billion over the full contract term, an amount reflecting a significantly higher growth rate than the state has delivered over the last 20 years under in-house operation.

The administration originally pursued the PMA to maximize lottery revenue to the state in order to increase funding for senior citizen programs. Under state law, all net proceeds from the Pennsylvania Lottery are used to fund programs for seniors—including senior centers, in-home services, property tax and rent rebates, prescription drug assistance and long-term living services—which are likely to face rapidly growing funding pressures as the Commonwealth’s senior population increases in the coming decades.

In January 2013, the Corbett administration signed the PMA contract with Camelot, but in February 2013 Pennsylvania Attorney General Kathleen Kane announced that she had rejected the agreement over concerns regarding its constitutionality and a lack of statutory authorization for an expanded set of gaming products as envisioned in the deal, which would have allowed the introduction of keno and online gaming. In response, the administration and Camelot agreed to extend the company's bid several times throughout 2013 to allow time to renegotiate the contract to address Kane's concerns and allow Corbett to seek legislative approval of a bill to address the statutory concerns. Neither ultimately came to fruition, prompting Corbett to reject another bid extension in December.

Despite the original PMA’s failure to launch, the issue may resurface in 2014. In walking away from the contract negotiated with Camelot, the Corbett administration suggested that a second lottery PMA effort may still be in the works via a new procurement in 2014. Last month, the Pittsburgh Post-Gazette reported that the Corbett administration had reached an agreement in principle with the state lottery workers’ union on a PMA concept in which the current staff of unionized state employees would be managed by a private lottery manager, remaining public employees and not transitioning to full private employment. The agreement had the effect of removing some legislative opposition to privatization, and at press time, the legislature was considering a bill that would authorize a PMA and the expansion of lottery games, which if enacted could potentially lead to a rebidding process based on a revised agreement structure.

For more information on lottery PMAs, see my articles here and here.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here. This article was featured in the January 2014 edition of the newsletter.

Leonard Gilroy is Director of Government Reform





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