After Christie's privatization, NJ lottery missing targets
Apr. 01, 2015
WASHINGTON (AP) — When Chris Christie privatized New Jersey's lottery two years ago, he said its new overseers would "modernize and maximize" the games.
Instead, a lottery once ranked among the nation's top performers is now lagging for the second straight year, trailing its state income targets by $64 million seven months into the current fiscal year. Meanwhile, the company running it has spent hundreds of thousands of dollars to hire lobbyists and a public relations firm with close ties to the governor.
New Jersey lawmakers anticipated receiving nearly $1.04 billion in income from the lottery this year, a number reduced to just $955 million in a revised budget released this month. Having collected an estimated $510 million seven months into this fiscal year, the lottery is not on track to meet even its lowered expectations.
The shortfalls could mean budget cuts to programs directly funded by the lottery system — such as after-school care, programs for veterans and education for the deaf — should the lottery's fortunes not improve.
The lottery's woes are one piece of New Jersey's fiscal troubles, which include transportation funding shortfalls and underfunded state pensions. At a state assembly budget hearing earlier this week, state Treasurer Andrew Sidamon-Eristoff blamed the lottery's underperformance on industry-wide trends and a shortage of big jackpots in multi-state games such as Powerball to drive sales.
Yet despite expanding its marketing budget and the number of stores at which tickets are sold, the lottery is still narrowly missing its goals — even on lottery tickets that aren't dependent on such jackpots.
"Missing the mark so badly with all of these proven methods for generating lottery revenues is like spitting and missing the floor," said John Kindt, a professor emeritus at the University of Illinois who studies gambling policy and has been critical of lottery privatization.
In 2011, New Jersey paid Macquarie Capital Group, an arm of an Australian investment bank, $1.8 million to study its lottery and recommend improvements. Macquarie, which counted lottery privatization specialists like Gtech S.p.A. among its past clients, found that New Jersey's lottery was one of the nation's top performers — it had growing sales and the highest profit margins of any in the country.
Macquarie recommended privatization anyway, and then advised the state on setting up the bidding for the work.
That same year, Gtech hired Wolff & Samson — the law firm of David Samson, one of Christie's long-time friends, whom the governor appointed to lead the powerful Port Authority of New York and New Jersey. It also brought on board Mercury Public Affairs, a firm at which longtime Christie political strategist Mike Duhaime is a partner, to handle communications.
Northstar New Jersey, a joint venture led by Gtech, was the only bidder in late 2012 when the state formally sought a private company to take over the lottery. It won a 15-year contract to run the vast majority of the lottery's operations, including ticket sales and marketing. A few functions, such as public relations, remain with the state, which oversees Northstar via a lottery commission whose members serve at Christie's discretion.
Neither Northstar nor Gtech returned multiple calls and emails seeking comment.
The state's Democratic legislature passed a law in May 2013 prohibiting Christie from privatizing the lottery without its consent. The governor vetoed the bill and moved ahead with the project. Northstar formally took over in October 2013.
Gtech's lobbying didn't stop when it got the lottery contract. Between 2012 and the end of last year, the company paid Wolff & Samson $460,000 to represent its interests. Wolff & Samson lobbyists did not respond to calls and emails seeking comment.
Wolff & Samson reported meeting regularly with state officials in charge of the lottery over several years, according to lobbying records. In response to public information requests for emails or notes from meetings with Wolff & Samson, the state's Treasury Department said no such records existed. The department later acknowledged the existence of a handful of emails, but refused to produce them.
Christie's push to privatize the lottery was billed as a way to make it run more like a business, but Northstar today spends more and employs more people than when the lottery was run by the state. During the state's last fiscal year, which included nine months of Northstar's management, the lottery reported $45 million in expenses and fees — or $10 million more than the state's administrative costs in the year before.
"The lottery believes Northstar is managing its expenses properly," said Joseph Perone, a spokesman for the state's Treasury Department.
Though Northstar fell short of its contractually set targets for income to the state by $55 million in the last fiscal year, the Christie administration unilaterally agreed to lower them — saving the company millions of dollars in penalties.
Perone said the state reduced the targets out of fairness, because the lottery was still recovering from Hurricane Sandy. The storm struck New Jersey in 2012, eight months before the Northstar contract was signed.
"As a taxpayer, I'd like to know why projections aren't being met, and what steps are being taken to remediate the problem," said Democratic Assemblyman Gary Schaer, a critic of the lottery privatization who chairs the state budget committee.
Schaer said his staff has struggled to get even basic updates on the lottery's financials, and was only able to review the lottery's most recent financial statements after The Associated Press provided his staff a copy of the lottery's February report, which it obtained via a public records request.
Northstar's performance in New Jersey echoed results in two other states in which Northstar runs lottery systems. The company fell just short of its targets in Indiana last year, and missed its Illinois lottery targets for three straight years before the state terminated the arrangement last year.
Despite that record, the minutes of New Jersey's lottery commission reflect little criticism or questions of Northstar officials in attendance. Public discussions instead include updates on which of the lottery's YouTube videos were the most popular.
"We're not going to sit here today and talk contract issues," lottery Executive Director Carol Hedinger said after the AP asked a question about Northstar's management during a public meeting last week.
Officials continue to struggle with how to meet the lottery's financial goals. At the lottery commission's February meeting, Hedinger optimistically said lower gas prices could mean drivers spending more on lottery tickets, and that a series of big payouts would provide a welcome boost to sales.
"We've got a lot of catching up to do," she said.
Associated Press writers Julie Walker in New York and Michael Catalini in Trenton, N.J., contributed to this report.