WASHINGTON – Two years after New Jersey Gov. Chris Christie privatized much of the state’s lottery operations, a big payoff remains out of sight.
Higher costs associated with the private company that Christie hired, Northstar New Jersey, have cut the state’s income for the second straight year, creating a $136 million shortfall in the state’s 2015 budget, according to internal documents obtained by The Associated Press. The results are poor enough that the state is entitled to fire the company if its performance doesn’t improve in the current fiscal year.
Now a 2016 presidential candidate, Christie didn’t immediately respond to questions from the AP. But he had said at the time the new arrangement would enable New Jersey to cut costs and create new sales. Christie’s office directed questions to the state’s Treasury Department, which praised the company’s “proactive and creative efforts” as the reason losses weren’t even higher. In a statement, the department said it was monitoring Northstar’s performance but declined to comment on whether the contract would continue.
The underperformance raises questions about the privatization strategy championed by Christie, who promoted lottery outsourcing as a way to shrink the government’s payroll and bring in more cash.
Christie’s push benefited some key political allies. During its ultimately successful pursuit of the state’s business, Northstar New Jersey hired the communications firm of Christie campaign strategist Mike DuHaime. The law and lobbying firm of former Port Authority chairman David Samson received $460,000 for lobbying on behalf of Northstar between 2012 and the end of last year.
Northstar is a partnership that includes GTECH S.p.A, the largest global lottery business, and Scientific Gaming. The two companies have sometimes brought in other entities to pursue lottery management contracts in several states.
Illinois, which privatized its lottery in 2011, tried to cancel a deal with a Northstar affiliate last year following contract disputes and perennial underperformance. Indiana, which hired an underperforming GTECH subsidiary in 2012, renegotiated the contract in June to reduce the lottery’s future targeted profits for the state.
The Record of Bergen County first reported New Jersey’s shortfalls on Sunday. According to the paper’s analysis of Northstar’s contracts, New Jersey will likely pay the company around $100 million for its services in the year that ended in June.
Much of New Jersey’s problems stem from disappointing ticket sales for Powerball and Mega Millions, multistate draw games with a high profit-margin compared to instant-game scratch-off tickets. After years of engineering of massive jackpots, the games are struggling to hold players’ attention. Powerball sales, for example, are down 17 per cent nationwide since last year amid what lottery analysts call “jackpot fatigue.”
But New Jersey’s sales of Powerball have fared even worse than the national average, falling 29 per cent from already-disappointing 2014 results. Sales of instant games, such as scratch-off tickets, performed better than traditional lottery games last year— but not by enough to offset the damage. The lottery brought in just $900 million for the state, its worst showing since 2009.
New Jersey said it does not know why its sales of draw games are lagging those of other states. One possibility is that the state’s relatively wealthy population doesn’t get excited about jackpots of less than $200 million, the lottery said in a statement to the AP.
Another possibility the state has already ruled out: underperformance by Northstar.
“The lottery is better off today with Northstar implementing sales, marketing and advertising services than when it was being managed exclusively by state employees,” lottery spokeswoman Judith Drucker wrote in an email to the AP.
New Jersey has put a good face on the numbers. In July, lottery director Carole Hedinger announced record sales for the year that ended in June and said she was extremely pleased with the lottery’s management.
The announcement omitted any mention of how much the state earned from those sales, which the AP obtained roughly two weeks after it asked for documents under the state’s open records law.
The documents showed the lottery struggling with higher expenses. Before hiring Northstar, New Jersey’s lottery enjoyed unmatched efficiency compared to other states, keeping 34 cents in profit from every $1 in ticket sales. Under Northstar, expenses rose, sending profit margins down to 30 cents on the dollar for the 2015 fiscal year’s $3 billion in revenue. Even continued sales growth won’t guarantee that the state will hit the contractually set profit targets.
Northstar must pay a penalty each year it underperforms, which this year would be about $14 million, the maximum given offsetting credits and penalties capped at 2 per cent of the state’s income. That means New Jersey will absorbs most of the $136 million shortfall.
Under the contract, New Jersey can fire Northstar without repaying any of the $120 million the company gave the state as an advance on expected profits from its 15-year deal.
Such a termination could be troublesome. The state would have to rehire much of the lottery’s daily management and rebuild the operation that was transferred to Northstar. It could also embarrass Christie, who championed the Northstar contract over the objections of New Jersey’s legislature.
Associated Press writer Michael Catalini in Trenton, New Jersey, contributed to this report.