NJ Lottery Market Changes, But Lowered Expectations Remain

Just two years into a long-term contract to run the New Jersey Lottery, the private, politically connected conglomerate that had "committed to generating at least $1.4 billion" in new income for the state went back to Gov. Chris Christie's administration with two complaints:

  • Jackpots in draw games like Powerball were underwhelming, dragging down sales goals.
  • And the state had denied the organization's plan to launch keno-style games in bars and restaurants.

So the administration agreed to slash the income targets of Northstar New Jersey by $1 billion over the remaining years of the contract.

Then changes to Powerball grew jackpots to record levels. And New Jersey added keno-style video lottery games to 400 locations last month. 

But despite these changes, the lowered income targets for Northstar remain the same.

The Christie administration has declined to say whether it has invoked, or plans to  invoke, a provision in the contract that allows it to seek more money from Northstar if market conditions change.

Deal frustrates critics

The situation with Northstar is frustrating to critics who characterized the privatization as a fast-cash maneuver for the state at a time of financial distress — a move that also benefited allies of Christie.

As part of the contract to run the lottery's sales and marketing, Northstar paid the state $120 million up front. It also hired the public affairs firm of Christie's chief strategist at the time, Mike DuHaime, and the law firm of his political mentor, David Samson. Samson is currently serving probation for bribery connected to his role as chairman of the Port Authority of New York and New Jersey. 

While Northstar has been penalized $20 million for missing its targets, it has also been paid $275 million since taking over the lottery's sales and marketing.

The organization stands to be paid nearly $60 million in fees alone for the 2017 fiscal year, based on unaudited figures in lottery documents, in addition to an annual management fee and reimbursements for marketing and operational expenses, which have averaged $43 million the past two fiscal years.

"The whole thing was a ripoff," said Hetty Rosenstein, state director for the Communications Workers of America Union, which represented lottery employees and opposed the privatization. "The state saved no money through privatization and lost money with Northstar, and it ended up being a big windfall for them." 

Northstar, the lottery and the Treasury Department declined to comment. 

Pressure to squeeze money from lottery

Every dollar counts in New Jersey, which has seen its credit status downgraded 11 times by three ratings agencies under Christie. The budget is constantly under stress, revenues often fall short of projections and lawmakers and government officials constantly look for new ways to ease the state's financial burden, even at a time like now, when the economy, as Christie often says, is "booming." 

Until this fiscal year, which began after July's government shutdown, proceeds from the lottery paid for education programs and social services such as housing for disabled veterans and operating psychiatric hospitals.

Now the proceeds are being funneled into the beleaguered public employee pension system under a new law signed by Christie that is aimed at chipping into the funds' nation-leading debt, with the general budget paying for the programs the lottery historically covered. 

Because the lottery's revenues are now tied to the pensions, the stakes for Northstar's performance have been raised, said Assemblyman Troy Singleton, D-Burlington.

Singleton, a member of the budget committee, opposed the deal with Northstar and has been frustrated by the organization's production and what he called excuses for missing targets. He called the contract "just another bad deal by the Christie administration." 

"There's no denying that the Northstar contract has been a financial failure for the state of New Jersey," Singleton said. "I'm hopeful that our next governor — whomever it is — will really examine this contract." 

It's possible that Northstar could ultimately send more money back to the state to support its pension payments.

In 2016, with the new, lower income target of $963 million, a record-breaking $1.6 billion Powerball jackpot helped the lottery record another banner year of ticket sales, and Northstar sent back $987 million to the state.

For the 2017 fiscal year that ended June 30, the state is owed $990.5 million, with $965 million guaranteed under the terms of the revised contract. On Wednesday, the second-largest Powerball jackpoint of $758 million was won by a 53-year-old hospital worker in Massachusetts.

A Paterson man, Juan Mendez-Garcia, won $1 million for matching every number but the Powerball.

And the lottery last month rolled out Quick Draw, the very type of keno-style game it denied Northstar from launching two years ago.

As of the end of the fiscal year, Northstar had contributed $945.7 million, according to unaudited state figures, but the Treasury Department has said that it expects Northstar to "meet or exceed" the income target. 

Unfulfilled promises

Even if it does, the state is on track to get far less than what Northstar promised when it won the 15-year contract in 2013.

The organization — which is made up by gaming companies IGT (formerly GTECH) and Scientific Games and a Canadian retirement system — projected it would increase sales so much that by the end of the contract in 2029 the state would see "at least" an additional $1.4 billion in income, with the possibility, the state said, of reaping as much as $6.88 billion. 

Those guarantees were quickly scotched.

Northstar fell short of its first-year goal by $55.4 million, owing the losses to Superstorm Sandy.

In 2015, with big-jackpot games like Powerball and Mega Millions in a sales slump, Northstar fell short of its target by more than $100 million and struck the deal with New Jersey to lower the overall figure it owes the state by $1 billion. 

Part of the reason New Jersey agreed to the downward revisions was because it denied Northstar its plan to launch so-called monitor games that year. The lottery said at the time that the denial was because it was "taking a holistic view of how new products will affect the state’s entire gaming industry – not just the lottery."

The state has declined to say what changed since then to decide the keno-style games are now allowed. But at a launch party in Hoboken last month, the lottery announced that it was rolling out the Quick Draw game to hundreds of bars and restaurants.

An internal Northstar document looking at the 2016 fiscal year obtained by The Record had anticipated monitor games to bring in roughly $59 million in sales, but the lottery appears to have tempered expectations, and says officially that Quick Draw is budgeted to return $20 million to the state.

The unaudited financial report from the lottery's executive director shows that the state budgeted Quick Draw sales of $2.4 million in its first month. But in two weeks of sales it fell nearly 50 percent short, with sales of $1.28 million, according to the report. 

The contract with Northstar includes a provision that allows the state to seek an upward adjustment of the income targets "should there be a material change in the gaming environment in the state," such as a law that would "expand lottery sales channels  for example or authorize game types or platforms currently unavailable to the lottery."

Carole Hedinger, executive director of the lottery commission, said in 2015 that "if the state decides to approve monitor games in the future, the net income targets may be adjusted accordingly." But Willem Rijksen, a spokesman for the Treasury Department that oversees the lottery, said "Treasury does not comment on contract negotiations (occurring or non-occurring)."

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