States Exploring Private Lottery Management

Illinois launched a groundbreaking privatization of lottery management in 2011 to increase revenues. Other states eye similar deals

On July 1, 2011, a private consortium took over operations of the Illinois Lottery, formally launching a first-of-its-kind lottery privatization initiative that is already prompting policymakers in other states to consider similar arrangements.

As reported in Reason Foundation’s Annual Privatization Report 2010, Illinois Gov. Pat Quinn announced the winning bidder for a contract to take over the management of the state lottery in September 2010. Officials expect the move to generate $4.8 billion for the state over the next five years, a $1.1 billion increase over the revenues projected under state management. Under the terms of the 10-year contract, the winning bidder-Northstar Lottery Group, a partnership between GTECH, Scientific Games and Energy BBDO-will take over responsibility for lottery operations, management and marketing functions in exchange for a portion of revenues. The state will continue to exercise control and oversight over all significant business decisions, including the state approval of annual business plans and ability to access all vendor information regarding lottery operations.

The deal also ties the operator’s compensation to its performance at enhancing lottery revenues. Through a combination of an annual $15 million management fee and incentives for extra profits, Northstar stands to earn over $330 million over five years if it reaches state-determined revenue targets. However, the contract includes a 5% total net income cap on the potential profits for the contractor, as well as penalties paid to the state if the company fails to hit revenue targets. The contractor will retain all current lottery employees and has announced its intention to hire an additional 100 private sector employees.

Under the privatization initiative, enhanced lottery revenues will be earmarked for education funding and new capital projects included in an infrastructure program approved by the legislature in 2009. Northstar’s strategy to increase revenues involves a combination of attracting more players, expanding the product line and adding hundreds of new outlets for lottery ticket purchases across the state. A June 2011 article in The State Journal-Register noted that Northstar is making progress on several of these fronts:

  • In the transition phase leading to the July 1st takeover date, Northstar introduced a new logo, new signage and several new instant “scratch off” games.
  • Throughout the spring of 2011, the lottery received over 1,000 applications from businesses seeking to sell lottery tickets, and over 400 of them had been approved by July 1st.

In August, the Illinois Lottery announced that it had ended the 2011 fiscal year with a record $2.28 billion in sales and record net transfers to the state totaling $686 million. “Northstar is taking our already successful business to levels beyond what we have seen before and will be able to continue to grow it through methods that would not have been possible as a purely state-run entity,” acting Illinois Lottery Superintendent Jodie Winnett said in an August press release. The press release also noted that five of the final six months of the fiscal year saw the highest instant ticket sales months in Illinois Lottery history, demonstrating that “the new energy and excitement brought by Northstar is yielding results,” given that the private operator began to take on management functions during an early transition that began in March 2011.

Illinois’ innovative shift to private management is already prompting policymakers elsewhere to consider similar transactions. For example:

  • Arizona: In its final July 2011 report, Arizona’s Commission on Privatization and Efficiency issued a recommendation that the state explore the potential private sector operation and management of the Arizona Lottery as a means to increase lottery revenues. COPE’s analysis found that the Arizona Lottery has been an underperforming asset, with costs rising significantly faster than revenues in recent years. COPE cited Illinois’ lottery management contract as a model worth exploring, noting that even assuming less generous terms than Illinois received, Arizona could potentially increase revenues by an estimated $107-210 million over a five-year period if it were to pursue a similar transaction.
  • California: The Sacramento Bee reported in October 2011 that Gov. Jerry Brown has “expressed tentative interest” in an Illinois-style lottery management contract that would generate approximately $1 billion in additional revenues to the state.35 According to the report, the Camelot Group-which operates the national lottery in the United Kingdom and advises California’s lottery-has had preliminary conversations regarding the proposal with the governor’s office and some state employee unions. Any move to privatize lottery management would require legislative approval and would be subject to competitive bidding.
  • Missouri: The State Senate’s Rebooting Government working group-designed to develop a package of streamlining and cost-saving reforms-issued a set of recommendations in January 2011 that included privatization of the Missouri Lottery. The Senate’s Governmental Accountability Committee subsequently held a spring informational hearing on lottery privatization where it heard from lottery officials and private vendors on the concept. No formal action was taken at that time, and at press time legislators had not decided if they would revisit the issue in 2012.
  • New Jersey: In early 2011, the New Jersey Department of the Treasury contracted with a consultant to assess the financial performance of the New Jersey Lottery and assess the desirability of privatizing its management. At press time, the results of this evaluation were not yet available. A 2010 transition report recommended that the incoming administration consider privatizing lottery operations. According to the report, “The Lottery would benefit from privatization with operations conducted by private management contracted by the State to manage, staff, and operate the administration of the Lottery. […] The committee believes a significant increase in gross and net revenues to the State will result from privatization.”
  • Ohio: As discussed in Part 4 of this report, the Ohio state legislators removed a provision in the 2012-2013 budget before passage that would have authorized the privatization of the management of the Ohio Lottery. However, the Kasich administration has announced plans to issue a request for proposals from consultants to analyze the potential for privatized lottery management and ways to maximize the lottery’s value. The firm Intralot already has a long-term contract in place to manage the backroom operations of lottery games, so the proposed privatization would cover management of the lottery itself, including marketing, employee management and other operations.
  • Washington State: In December 2011, Gov. Christine Gregoire announced a series of reform measures her administration will present to the state legislature in the 2012 legislative session to help close an estimated $2 billion budget deficit. One element of the reform package includes directing the state lottery to issue a request for proposals to determine the feasibility of shifting lottery operations to the private sector to generate more revenue for education. Any savings achieved would be directed to the state’s Washington Opportunity Pathway account that supports higher education and early learning programs. “I want to see if the state lottery can be managed for less money through the private sector,” Gregoire said in a press release. “If it works, it could provide more funds to support critical education programs.”

Leonard Gilroy is director of government reform at Reason Foundation. A version of this article originally appeared in Reason Foundation’s Annual Privatization Report 2011, released in April 2012.