New Jersey joins a list of states considering privatizing their lotteries

Posted: April 29, 2012

Interested in a piece of New Jersey's government? With Gov. Christie in office, now's the time to buy, buy, buy.

In recent months the Republican governor's administration has amped up efforts to privatize government services, which would generate short-term revenue and cut the number of benefit-receiving employees. State parks, public schools, and Atlantic City Expressway toll booths all have been opened to outside companies.

At least a dozen functions of state government are being filled by companies or are targeted for privatization, public documents show, with the Christie administration considering proposals from firms to maintain highways, repair state vehicles, cook prison food, and process child-support payments.

The next piece of New Jersey government that may hit the market could provide the biggest windfall - and the biggest controversy. The Treasury Department has sought information from vendors about privatizing the $2.6 billion state lottery.

The move mirrors what's happening in Pennsylvania, where Gov. Corbett this month issued a "request for qualifications" from companies that might want to manage its $3.2 billion lottery.

Other states are considering offering long-term leases on their lotteries. Such a move would bring an immediate infusion into New Jersey's coffers, expand gaming opportunities, and allow the state to tax profits.

But, one expert warns, a heightened lottery profile could be harmful to compulsive gamblers and bring more lottery terminals to poor neighborhoods.

The New Jersey Lottery generated more than $930 million for use by governmental programs last year, with $106 million going to education, $156 million to state psychiatric hospitals, and $582 million to colleges and universities, according to the Treasury Department.

Companies have already submitted ideas to the state about how privatization might work and hope to see a formal request for proposals in the coming weeks.

"There's been discussion" about privatization, confirmed the chairman of the New Jersey Lottery Commission, Frank V. Ragazzo. A request for details of the potential arrangement was ultimately referred to the state Treasury Department, which would not comment.

Spokesmen for Christie likewise did not return requests for comment about outsourcing the lottery.

Christie has not been shy about publicizing his efforts to privatize other areas in order to shrink government and cut the budget.

When he announced the partial privatization of the state's park system last year, he held a news conference at a park. And he celebrated passage of the Urban Hope Act, which allows nonprofit operators and private subcontractors to build and run public schools in certain districts, including Camden. School boards must approve the arrangements.

Economists differ on the long- and short-term benefits of privatization, but Christie is bullish. He created a privatization task force early in his term and named former New Jersey Congressman Dick Zimmer its chairman.

The task force concluded that privatization would bring "lower costs, improvements in the quality of public services, and access to private-sector capital and professional expertise."

Last year, the Treasury Department quietly commissioned a report to explore changes to the lottery recommended by the task force. The report has not been made public, and a department spokesman did not answer questions about how much it cost.

Next, the Treasury issued a "request for information" that asked private entities what they would do to increase lottery revenue.

One of the world's biggest players in lottery, GTech, responded with information about its experience running the Illinois lottery in a consortium with another company, Scientific Games. GTech is a subsidiary of an Italian firm and operates in 26 states - including New Jersey, where it has a contract to operate electronic lottery terminals.

GTech spokesman Robert Vincent said that New Jersey's lottery was in the "top tier" in the United States but that a private operator would have more "flexibility" to expand into other games and increase advertising.

"Lotteries are a multibillion-dollar business," he said. "But states are beginning to become attracted to the idea that maybe the private sector, with the right incentives, will make it grow even further."

A British firm, Camelot, also is interested. In a statement, a company spokesman said the game had changed since New Jersey started its lottery in 1971. Camelot has worked with other governments "to help their lotteries adapt to the modern marketplace, diversify the player base, increase social responsibility, and maximize revenues," he said.

Talk of privatization does not sit well with the Communications Workers of America, the state's largest union. Lottery companies are scandal-prone, and politicians show no evidence of cost savings when they propose these plans, said Hetty Rosenstein, the union's state director. She said the objective was "ideological," about diminishing the government, not saving the public money.

In addition, she asked: "Who ends up being connected to all of these contracts?"

Companies that get state lottery contracts are notorious for their campaign contributions.

GTech, its political action committee, employees, and their family members have made $4.1 million in campaign donations since 1991, according to the nonprofit Sunlight Foundation, which tracks donations.

In 2001, Scientific Games donated $37,000 to the New Jersey Democratic State Committee. Its contract to handle instant games for the state began nine days later, state documents show. That contract expires in June.

Though several of the state's lottery functions are contracted out, public employees handle central office functions such as management, security, marketing, and sales. The lottery has about 150 employees, seven of whom earn more than $100,000, according to state records.

In the event of privatization, employees could be laid off, transferred within state government, or hired by the new company. When Christie pulled the plug on the state-owned New Jersey Network, selling it to WNET in New York last year, former employees were laid off or rehired by state government or the new entity, NJTV.

Since New Jersey's public employees collect pensions, a major reason to privatize is to "get out of the pension game," said Richard McGowan, a Boston College finance professor and expert on state lotteries.

Companies pay states large lump sums for multiyear leases to run their lotteries, he said. The states then tax the companies' profits at a high rate, such as 25 percent. The nature of the tax arrangement typically determines whether the state loses or makes money on the deal, he said.

Firms make money by growing the lottery - by being "more aggressive" with advertising, expanding into poor areas where there are loyal customers, and marketing the games so they seem cool to a younger generation, McGowan said.

But expansion can create more gambling addicts. Even though a company's goal is to make money, given the "social cost," McGowan said, "this is not an industry where you want to maximize profits."


What's for Sale in N.J.?

The lottery. The state has sought "information" on privatizing its lottery system. Responses are being considered.

Tolls. The South Jersey Transportation Authority hired a company in January to collect tolls on the Atlantic City Expressway.

Highway maintenance. In September, the state sought companies to replace Department of Transportation crews in three areas, including Camden and Gloucester Counties. A bid has not been chosen.

Vehicle maintenance. The state has sought information on "using a private company to handle all or some vehicle maintenance and repair," but has not requested bids.

Child-support payment processing. Bids were due in December to privatize the processing of child-support payments. A bid has not been chosen.

Prison food services. Bids were due in February for a two-year contract to run food service at Bayside State Prison. A bid has not been chosen.

Schools. Under a law signed this year by Gov. Christie, nonprofit management companies can run public schools in some districts, including Camden, and subcontract services such as staffing to private firms, with the school board's approval.

Public TV. Last summer Christie turned over the state's owned-and-operated TV station, New Jersey Network,

to WNET in New York.

Racetracks. The state is turning over operation of the Meadowlands and Monmouth Park to private entities.

State parks. In October, Christie announced some park operations would be privatized. By 2015, 38 percent of the parks' budget would come from deals with private and nonprofit entities to sell food, rent canoes, run golf courses, and hire lifeguards, among other services.

Housing for the developmentally disabled. A task force is exploring closing one or more state centers for the developmentally disabled and moving residents into community-based housing, generally run by nonprofit agencies that contract with the state.

NJ Transit parking. The transit agency announced a plan last year to privatize parking at its 81 train stations. The plan is reportedly delayed, but bids are likely this year.


- Matt Katz


Contact Matt Katz at 609-217- 8355, mkatz@phillynews.com, or follow @mattkatz00 on Twitter. Read his blog, "Christie Chronicles," at www.philly.com/ christiechronicles.

 

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