Updated: State Forges Ahead on Lottery Privatization

By Melissa Daniels | PA Independent

HARRISBURG — It always comes back to money.

When Pennsylvania decided to explore privatization of the state lottery, it entered unknown territory filled with questions and critics. But the green-colored heart of the debate is what entity can score better profits – a private company, or the state government.

It looks like the state put its money on the private sector: The Corbett administration on Friday afternoon agreed to a “notice of award” with Camelot Global Services to operate and expand the Pennsylvania Lottery, indicating intention to move forward with a 20-year private management contract.

Since privatization plans started revving up in late 2012, lawmakers on both sides of the aisle said the process was moving too fast and without oversight. The state’s largest public-sector labor union, supported by Democrat lawmakers, filed a lawsuit questioning if the privatization is even legal. And State Treasurer Rob McCord has said he might not even be authorized to pay Camelot under state law.

But on Monday, they should hear some answers to their questions. The notice of award means the state can air details about the bid that were previously confidential.

The Senate Finance Committee will still hold a scheduled hearing Monday in the Pennsylvania State Capitol with administration officials, Camelot executives and representatives of lottery employees and senior citizens. Lottery profits funds programs for senior citizens like property tax rebates, free rides and hundreds of senior centers.

Chairman Sen. Mike Brubaker, R-Lancaster, said the goal is to understand the financial implications of privatization, and address the legal questions — in full view of the public. He said he hopes the hearing will ensure that lawmakers’ questions are answered, and that the issue is properly vetted.

“I have stood by my word from day one as the chair of this committee stating that the significance of this issue warrants a public forum to provide members of this legislative body and all Pennsylvanians an open dialogue with the stakeholders,” Brubaker said after news of the agreement.

The administration said that the notice of award is not a binding contract with Camelot. But it will allow “the opportunity to disclose contractual and procurement details” at the Senate hearing, according to a statement from the administration.

Back in early 2012, a state legislative report highlighted the need for the lottery to earn more money to keep senior citizen programs afloat in the face of a growing aging population. From there, the administration took over.

Privatization bids were solicited throughout the spring and summer, though two companies dropped out along the way. One found the state’s private management agreement too one-sided, and the other wanted to pursue other opportunities, according to the state.

Left as the sole bidder was Camelot, which manages the National Lottery in the United Kingdom.

In Pennsylvania, Camelot proposes average annual lottery profits between $1.1 billion and $2 billion, totaling about $34 billion in a 20-year span. The group plans include new games, like video-based Keno, to boost the bottom line.

To help push its plans, Camelot’s hired two of the state’s marquee lobbying firms, Greenlee Partners and State Street Strategies, along with Harrisburg-based spokesman David LaTorre.

A statement from Camelot said that it intends to keep as many current lottery employees as possible, and increase jobs overall.

“We know the state has placed enormous trust in giving us responsibility for its Lottery and we intend to work tirelessly to earn that trust,” the statement read. “We are confident in our projections on growing responsibly the Pennsylvania Lottery over the next 20 years and guaranteeing the economic future for seniors programs.”

Camelot’s bid has a $200 million guarantee that would kick in if the company misses its projected profits. No such back-up exists now if actual returns fall short.

State officials said they would only execute the agreement if proposed profits are “significantly higher” than the levels the Pennsylvania Lottery would achieve on its own. There’s little basis for comparison in other states. Only Indiana and Illinois have moved toward a privately managed lottery, and Illinois has found itself in a court battle with its private manager.

The Commonwealth Foundation, a free- market think tank in Harrisburg, crunched the numbers and found Camelot’s bid would add an additional $2.3 billion in the first 10 years of the agreement, when compared to past average growth.

But the public-sector labor union representing lottery employees said it could out-perform Camelot by $1.5 billion in a 20-year period, if it expanded the lottery on its own terms.

The American Federation for State, County and Municipal Employees Council 13, which represents 174 of the lottery’s 258 employees, proposed its own expansion plans earlier this week. The state did not comment on the proposal, beyond the fact that it was under review.

The news of an agreement with Camelot left AFSCME outraged. Executive Director Dave Fillman called it a “midnight raid,” and said Gov. Corbett ignored the General Assembly by running through the deal when it was not in session.

Michael Fedor, an AFSCME employee who worked on the proposal, said that profits would be better under a public expansion,because under a private manager, extra profits could be taken in by the company instead of returned to the state.

The lottery broke its own profit records in 2012 with returns of $1.06 billion.

Right now, the law requires the lottery to make returns at a minimum level of 27 percent of gross sales. But the minimum is scheduled to go up to 30 percent in 2015.

AFSCME said it is concerned that Camelot’s agreement with the state will lock in the 27 percent rate, causing a drop-off in earning more for the programs.

“The state, in our research, has never funded at the minimum level,” Fedor said.

Past state research shows that figure went from nearly 39 percent in 2002 to nearly 30 percent in 2011.

Supporters of privatization say handing over management would give a more consistent funding stream.

State Rep. Seth Grove, R-York, said the state needs to do something to make sure senior programs don’t end up cut off from its money stream. A private-management agreement with Camelot can correct lottery funding volatility seen in the past, he said.

“We’ve seen huge increases, we’ve seen decreases, we haven’t seen any consistent of funding,” he said.

Ashton-Theodore Randle is the director of government affairs at the Case Management Society of America, a Washington, D.C.-based membership group for health professionals who work with seniors. He took to The York Daily Record to write an opinion column on why consistent funding is necessary for the state’s programs.

In other states, similar programs are run off tax revenues. But for lottery-based funding, Randle said a private company may provide more consistency than the state.

“These people are experts at what they do, as far as managing lottery systems,” Randle said. “Having an opportunity to have a private manager is a great thing for Pennsylvania.

Contact Melissa Daniels at melissa@paindependent.com