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Indiana ready to follow Illinois in privatizing lottery operation

Published: Monday, Nov. 26, 2012 8:55 a.m. CDT

(MCT) — Stealing a page from Illinois, Indiana will soon become the second state to use a private company to run its lottery.

After last year becoming the first state lottery in the nation to use a private manager, Illinois saw record revenues that nonetheless fell short of profits promised by Northstar Lottery Group.

Officials from the Hoosier Lottery kept a close eye on Illinois' arrangement before signing a 15-year contract last month with lottery industry giant GTECH, one of Northstar's parent companies.

"We certainly took note of the fact that the Illinois Lottery experienced double-digit sales growth," in the 2012 fiscal year, said Hoosier Lottery spokesman Al Larsen.

"At the end of the day and regardless of the debate over whether targets were hit or not hit, that ... is the type of growth we look forward to experiencing here in Indiana."

Industry experts say it is likely more states will adopt private management as a way to kick-start stagnant lottos or to increase growth at healthy ones.

In August, New Jersey officials asked for proposals to manage its lottery, and last week Pennsylvania Gov. Tom Corbett said the state had finalized terms of a potential 20-year contract to manage its lottery. It also was evaluating business plans offered by prospective bidders, he said.

If an acceptable plan is found, the contract could be executed within the next several months, according to a spokeswoman for Corbett.

"What I think will spread is a more open-minded attitude toward creative ways of unlocking the value of lotteries," said Paul Jason, CEO of Public Gaming Research Institute, a Washington-state-based group that promotes lotteries in the U.S. and abroad.

"I think private management agreements and variations on that theme will very likely be a part of the picture, but also think that there may be new models created in the future that we haven't seen yet."

Still, the move toward private management is not without detractors.

The Tribune reported this month that an arbitrator agreed to reduce last year's net revenue target for Northstar by more than $28 million. That figure, which represents the profit the company promised to raise for the state lottery, is central to a complex set of calculations used to determine whether the company will collect incentive payments or owe penalties for underperformance.

Unofficial year-end results from the Illinois Lottery indicate the company fell about $100 million short of the promised revenues, though Northstar contends that when an audit of the 2012 fiscal year is complete, it will miss its target by $40 million to $50 million.

If company officials are correct, it could be entitled to millions in incentive payments.

"I think if I'm Northstar, I'm pretty happy. If I'm a citizen of Illinois, I'm feeling ripped off, because we didn't get the benefit of the contract," said state Rep. Jack Franks, D-Marengo, long critical of the private management agreement.

"They didn't make their numbers and yet it's conceivable that we could end up owing them money. That's mind-boggling."

Franks said the Illinois Lottery should have hired better managers rather than outsource the day-to-day operation of the lottery.

Jason said the issue isn't only about whether lotteries need better talent internally. It's also about whether a state agency and elected officials can stomach greater risk-taking to achieve higher profits, he said.

State leaders fail to encourage their lotteries to take greater risks in order to boost revenue, and they also tamp down innovation, he said.

"Sometimes they tell them, 'If you attempt to innovate and make a mistake, heads will roll,'" Jason said. "So there's little expectation on the part of (elected officials) to achieve ambitious results, but there's huge expectation to avoid making any kind of mistake."

Still, Franks' position is not without merit, Jason said. Government officials need to consider whether they could achieve greater growth by freeing up their lotteries to act more like a private company rather than bring in outside help, he said.

"It's not done now," Jason said, adding that "lotteries all over the nation would achieve better results if the legislatures and the governors were to give them the same kind of support and latitude as they are considering giving a private manager."

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